What truly causes a housing bubble and the inevitable crash? For the best explanation, let’s go to a person who correctly called the last housing bubble – a year before it happened.
“A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation…Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the ‘bubble’ bursts.
“I have taken to calling the housing market a ‘bubble’.”
– Bill McBride of Calculated Risk calling the bubble back in April 2005
Where do we stand today regarding speculation?Continue Reading