Did I buy My Home In a bubble ? Am I going to take a Haircut? Am I going to Loose Everything ?
28My Opinion: Even If I bought in A bubble im not worried I paid under 300k for my home to Raise my Family ! Its not a decision I wont live to regret !
KEY TAKEAWAYS
A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets.
This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a "crash" or a "bubble burst."
Bubbles are typically attributed to a change in investor behavior, although what causes this change in behavior is debated.
The research of American economist Hyman P. Minsky helps to explain the development of financial instability and provides one explanation of the characteristics of financial crises. Through his research, Minsky identified five stages in a typical credit cycle.
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While his theories went largely under-the-radar for many decades, the subprime mortgage crisis of 2008 renewed interest in his formulations, which also help to explain some of the patterns of a bubble.
Displacement
This stage takes place when investors start to notice a new paradigm, like a new product or technology, or historically low interest rates. This can be basically anything that gets their attention.
Boom
Prices start to rise. Then, they get even more momentum as more investors enter the market. This sets up the stage for the boom. There is an overall sense of failing to jump in, causing even more people to start buying assets.
Euphoria
When euphoria hits and asset prices skyrocket, it could be said that caution on the part of investors is mostly thrown out the window.
Profit-Taking
Figuring out when the bubble will burst isn’t easy; once a bubble has burst, it will not inflate again. But anyone who can identify the early warning signs will make money by selling off positions.
Panic
Asset prices change course and drop (sometimes as rapidly as they rose). Investors want to liquidate them at any price. Asset prices decline as supply outshines demand.
Examples of Bubbles
Recent history includes two very consequential bubbles: the dot-com bubble of the 1990s and the housing bubble between 2007 and 2008. However, the first recorded speculative bubble, which occurred in Holland from 1634 to 1637, provides an illustrative lesson that applies to the modern-day.
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Tulip Mania
While it may seem absurd to suggest that a flower could bring down a whole economy, that is exactly what happened in Holland in the early 1600s. The tulip bulb trade initially started by accident. A botanist brought tulip bulbs from Constantinople and planted them for his own scientific research. Neighbors then stole the bulbs and began selling them. The wealthy began to collect some of the rarer varieties as a luxury good. As their demand increased, the prices of bulbs surged. Some rare varieties of tulips commanded astronomical prices.
Bulbs were traded for anything with a store of value, including homes and acreage. At its peak, tulip mania had created such a frenzy that fortunes were made overnight. The creation of a futures exchange, where tulips were bought and sold through contracts with no actual delivery, fueled the speculative pricing.
The bubble burst when a seller arranged a big purchase with a buyer, and the buyer failed to show. At this point, it was clear that price increases were unsustainable. This created a panic that spiraled throughout Europe, driving the worth of any tulip bulb down to a tiny fraction of its recent price. Dutch authorities stepped in to calm the panic by allowing contract holders to be freed from their contracts for 10% of the contract value. In the end, fortunes were lost by noblemen and laymen alike.