Bubbles

I'm forever blowing bubbles,

Pretty bubbles in the air,

They fly so high,

Nearly reach the sky,

Then like my dreams,

They fade and die.

Fortune's always hiding,

I've looked everywhere,

I'm forever blowing bubbles,

Pretty bubbles in the air.

 

We've seen "bubbles" a few times. Few of us notice them when they are growing, only when they "pop." I am speaking of economic bubbles here. They are useful economic devices, these bubbles, but very dangerous. Creating, or expanding (by encouraging), a bubble can bring an economy back from a recession or out of a doldrum.  Those that recognize a bubble can benefit financially from it. Most of us don't. Most of us eventually get hurt by the collapse of one. 


Take the real estate bubble of a few years ago. I took advantage of it when it inflated the price of my home in West Palm Beach. It paid for my house here in Paradise when I sold it. The false equity did, that is. What is "false equity?" That would be the amount of equity above what a "normal" market price would offer. Let's say you bought a house in 1993 for $120,000 (as I did), that home would be worth $161500 in 2005 in a "normal" market. Except we were in a real estate bubble in 2005 and the home was worth more than twice that amount. After we bought our home here, of course, its value dropped quite a bit  when the real estate bubble "popped" but that would only matter if we tried to sell the house... something we did not  (and do not) plan to do.


Timing is everything. While I was still in West Palm Beach, a co-worker told me how he was making money on the side... by being part of a group of people who speculated in real estate. It was a great idea... as long as the bubble was growing in size. But all bubbles eventually burst, just as they did when we were little kids. And when this bubble broke, this co-worker and his group  saw their fortunes dwindle.... rapidly.

Like all things in a market; it's buy low, sell high to make money. The time to get out is before the bubble deflates. The big problem is recognizing just when that is. I got lucky with real estate, many others did not.