How does a real bubble get created? and when does it burst?

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I maintain that its when

1) artificially low interest rates for a long time (Supposedly to hide some other economic issues)
2) lack of regulations for risky or fraudulent speculation in real estate.
3) extremely risky lending practices brought about especially when lenders making these risky loans do not have to portfolio them themselves and themeselves run the risk of negative impact of the future defaults.
4) when the risky loans are sold all over the world as part of “safe” investment pools creating an even greater demand for these risky mortgage loans

It all comes crashing when the high default rates start happening and many so called good investments are found to be near or at defaults, and creating a shortage of willing investors in real estate loans causing the real estate market to drop in value as less and less people are willing to buy real estate or able to find real estate loan money even if they are willing to buy. Of course with Riskly loans not being a pariah, demand for real estate perhaps being cut by half, prices of real estate drop with the lesser demand for real estate. Excessive avoidance of real estate follows excessive demand and this is called a correction.

Any other opinions out there?

  1. Reply
    May 3, 2011 at 7:25 am

    It sounds like you pretty much pegged it. When a ‘bubble’ bursts is probably a function of market saturation.
    Maybe #2 was a case of over regulation without overseeing?

    What very few know: Acorn Housing Corporation – the organization that arranged these questionable loans – is still doing it under new names like: Affordable Housing Corporation, Californians for Community Empowerment or New York Communities for Change.

    This guarantees that Freddie & Fannie will keep coming back for bail outs.
    Freddie Asks for $ 10.6 Billion – May 6, 2010

    How One “Community” Group Helped the Housing Crisis Harm Taxpayers

  2. Reply
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