The Nattering Nabob has a very pithy (and astute) observation of what makes a bubble:
Manias share four common characteristics:
• A feeding frenzy sends prices parabolic.
• The public jumps in with both feet.
• Valuations detach from economic reality.
• Rationalizations abound for why valuations are reasonable and the trend will continue.
There are several reasons I have been reluctant to call the Real Estate market a bubble — yet.
- The market is regional; San Francisco, NY and Boston do not = the entire US;
- Its an illiquid market, and properties take a while to sell (as opposed to being flipped intraday);
- Most buyers care little about purchase price — they are concerned with monthly carrying costs. Insurance and Taxes have remained fairly stable;
- 40 year low interest rates allows people to buy more expensive homes, so long as they can afford the monthly nut.
I do expect the hottest areas to fall by as much as 30%, if rates keep rising (as many expect they will) . . . Is that a bubble popping — or merely a retracement of outsized gains?