Beware the Bubble

By: Victor Normand

My daughter Emily recently returned from a trip to Europe with a gift for her dad. It sits in front of me now as I write. A small brown paper bag with little holes punched on two sides so that the tulip bulbs inside can breathe, I assume they need to breathe. If this present of tulip bulbs and its long ago circumstances were described in a novel, its significance would eventually be revealed. Students of economic history may already have an idea of its place in this story.

Housing and real estate news have regularly of late, contained articles speculating on the growing signs of another housing bubble, especially in some red-hot markets. Not far from Acton, many communities closer to Boston and in Boston itself are seeing behaviors characteristic of a bubble in the making. Multiple and over-asking offers on homes are occurring with predictability, causing asking prices to rise ever higher.

The term” Bubble” dates back centuries and economic bubbles were occurring even before we had such a name for them. The term bubble derives from the prices paid for stocks that were inflated and expanded by nothing but air and are vulnerable to burst suddenly. Investors were most prone to be the victims of bursting bubbles though recent history has shown that ordinary home owners can get caught as well.

Bubbles form when the price of an asset, like a home, deviates substantially from its intrinsic value. Unfortunately, the intrinsic value is more often not revealed until after the bubble has burst. Most economists believe that bursting bubbles are a recurring feature of our modern economy. Models used to predict periods of irrational pricing rely on analyzing the expected stream of income or dividends, which is no help to buyers of single family homes.

The maddening aspect of bubble formation is that they present profit opportunities for investors who are in early and most importantly, out before the bubble bursts. These Ponzi scheme participants manage to find a chair before the music stops.

The key element for home buyers who are in the market during times of hyper price escalation is to expect a bubble. However, if the target property is in the right location, fits the buyers needs and desires and most importantly, occupancy is expected for an extended period of time, it’s right to make the buy. Home equity lost during the Great Recession of 2008-2009 has returned to most markets across the country. And here at Acton Real Estate, our “Resident Experts” have had lots of experience in all markets and can help you make those decisions.

As for the tulip bulbs Emily brought back from the Netherlands, in the Fall I will be planting them and thinking about how investors were paying a small fortune, as much as 5,500 guilders for a single bulb! That was enough to buy a small house in Amsterdam at the time. Tulip Mania of 1636-1637 is often said to be the first true economic bubble in history. As for my bulbs, I have assessed their intrinsic value based on having a loving memory of my daughter’s thoughtfulness.  Having said that, 5,500 guilders IS a lot of money!

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