Triggers for Hypervaluation

Shaun @ Tru6 · 12-04-2009, 11:13 AM

Hypervaluation of housing prices was part of the complex sequence of events that ultimately led to our recession.

What are some of the triggers, and their roots, for hypervaluation of assets in a free market economy? For example, easy and cheap money are enablers, but can they be considered triggers? I'm looking for root causes more than companion issues and their repercussions, though those are welcome as well.

McLovin · 12-04-2009, 11:24 AM

That's a good question. I think the "trigger" is, ultimately, the desire to make a return on an investment (a good desire), combined with the media and a herd mentality/lack of analysis/failure to grasp objective reality (bad things).

These reach a point to where a bubble is created. Once that bubble is started, it is off to the races. You saw it here, among many who are otherwise fairly smart. During the bubble, reality, and even clear history, is thrown out the window. "Real estate never goes down." The herd starts moving, and no one wants to be left behind. The media gets behind it and drives it harder (coverstories on the magazines about everyone from 22 year old kids to 55 year old housewives "cashing in" on real estate, etc.). It loses any touch with reality, and basically becomes a Ponzi scheme.

We saw it with real estate in the late 80s, tech stocks in the 90s, and then real estate again in the '00s. Money does seem to need to flow somewhere, and it seems like an asset bubble is always being created somewhere.

strupgolf · 12-04-2009, 11:26 AM

Everybody (mostly) wants something they don't have and will use any means to get them. They all want to live high today and worry about paying tomorrow. That's what people did, and now it's what King Obama and the jerks in Washington are doing now. Better than you, better than you, better than you.

red-beard · red-beard's Garage

There was a WSJ article which basically showed that most of the "bubbles" were not a problem until people started borrowing money to invest. Once you start getting a bubble of debt, that is the point to be scared.

We've had the internet bubble, the housing bubble, now we are in the final stages of the government bubble.

McLovin · 12-04-2009, 11:32 AM

Washington doesn't mind asset bubbles because Washington is short sighted. Asset bubbles create the illusion of economic growth and prosperity, while the bubble remains intact. So they do what they can do to keep the bubble intact.

This, for example, came in things such as Alan Greenspan's audacious lie, during the peak of the housing bubble, that "There is no housing bubble."

It takes the form even today, as the government is doing everything it can to prop up the tattered remains of the housing bubble, by trying to prevent housing from returning to its true value, and trying to keep the prices as artificially high as possible. The govt still refuses to acknowledge that the housing prices were fake.

M.D. Holloway · 12-04-2009, 11:42 AM

don't know about that but I do know what causes hyperventalation...

red-beard · red-beard's Garage

That would cause once of my assets to bubble

Shaun @ Tru6 · 02:26 PM

Quote:

Originally Posted by red-beard

There was a WSJ article which basically showed that most of the "bubbles" were not a problem until people started borrowing money to invest. Once you start getting a bubble of debt, that is the point to be scared.

We've had the internet bubble, the housing bubble, now we are in the final stages of the government bubble.

though still very early into my research into banking & trading, it would seem that cheap money is a requirement for asset hypervaluation. it's interesting that folks that would otherwise be considered sophisticated investors are herded through multiple cycles of debt/borrowing based against the original assets until they're over-leveraged by over 30X original value, which was inflated to start.

the actual trigger though, what pushes that price up at the very beginning?

Dantilla · 12-14-2009, 02:57 PM

Herd mentality.

Everybody rushed into tech stocks during the net boom and bust because it was the place to be.

As a guy who makes money with real estate, I quit buying when the herd started chanting "Real estate...Real estate..."

Now that the masses are fleeing real estate, I'm starting to look again. Now is the time to buy, because the popular thing is to get out.

Crowbob · 12-14-2009, 03:07 PM

Still early to get back in, I think.

turbo6bar · 12-14-2009, 06:29 PM

Like the other posters, I believe bubbles are fueled by greed and underestimated/ignored risk.

As far as a trigger, I don't think one could nail down a nexus. Multiple conditions could set up a bubble.

I can see how the peons (the citizens) could be fooled by the last bubble, but how did the financial big-heads fall for the trap? Were they looking for perfect profits without due diligence? Were they assuming risk was zero? This reminds me of a proverb about bankers. I don't remember the exact wording, but it was: A banker who shuns risk and keeps his bank afloat isn't admired. A banker who takes risk, maintains pace with his competitors, and fails, isn't punished. That banker was merely going with the crowd. Sad, isn't it?

turbo6bar · 12-14-2009, 06:35 PM

crowbob, I think it is also early for the RE money train, but the deals are certainly looking better by the day. Cap rates for single family residential real estate in TN are well north of 10, now (quality single family homes in nicer neighborhoods), and I don't have to fudge the numbers. The only thing that keeps me away, for now, is the federal tax credits for homebuyers and climbing delinquency rates. Next summer could yield great fruit.

Shaun @ Tru6 · 12-14-2009, 06:53 PM

it could very well be the trigger is as elusive as finding the car that caused 5 miles of traffic.

Tobra · Tobra's Garage

Words of wisdom from Daniel, in the Great Pacific Northwettest.

I don't think that there is a trigger really, it just builds until it can't anymore. It is driven by greed, and Man's basically selfish nature. Interest rates were too low, for too long, so it got huge. As you say, money has been cheap.

In RE, everybody involved has a cash incentive to have the property go for the maximum amount possible, well, except for the buyer. The merry go round makes a few turns and the stakes get pretty high. No particular trigger, just relentless pressure to go higher.