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When Boom Turns to Bust, there are few hallmarks that define any bubble

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moh malekpour

Thread Starter
Elite Member
May 25, 2002
Professional Status
Certified Residential Appraiser
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There are a few hallmarks that define any bubble. One is the popular notion that making money is so easy. Another is the belief that anyone can do it. Yet another is the sense that even if things don't quite work out, there's little or no downside.

Yet when boom turns to bust, one outcome is always the same: fools who should have known better, saddled with large losses, desperately trying to pick up the pieces. In "How Safe Bank Tried Subprime And Got Singed," the Wall Street Journal reports on the fallout afflicting one institution that apparently saw only upside during the easy money days of recent years.

Randolph Kinney

Elite Member
Apr 7, 2005
Professional Status
Retired Appraiser
North Carolina

Many people look at bubbles and their ensuing bust as one of containment. People tend to minimize the problem and the affect on other assets. Just as subprime loans represented low income borrowers and that portion of the real estate market, it becomes a generalized problem with falling real estate values. Just as all real estate is local, it becomes a generalized problem across the nation.

When the mortgages of subprime were securitized and rolled into other types of financial instruments, defaulting mortgages downgraded the entire security. The results of all the losses have not been felt or realized completely.

What will happen is that lawyers will come in and sue any entity that has a hand in any security loss; buying it, selling it, underwriting it, making derivatives from it, etc. Wall Street is especially vulnerable. Truly, without Wall Street investment banking, the multiplying credit bubble and therefore the money bubble would never have created the real estate bubble.

When all that debt created backed by real estate, deflates, it will have an additional multiplying affect on real estate values; downward. I say additional because credit availability has already been reduced and restricted. Prices have fallen because of reduced availability of credit. Prices will continue to fall because of deflating debt as the asset is liquidated to pay debt.

We need a different term to describe this phenomena other than a bubble bursting because it is much more than that. This phenomena is leaving a hole in place of the bubble. Maybe a sinkhole is a better descriptor?
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