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Real Estate Investing : Real Estate Investors Last Updated: May 14th, 2012 - 22:24:01

Real Estate Bubbles

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Real estate bubbles are periods when property trades in high volumes at prices that are considerably at variance with intrinsic values. The Southern California real estate bubble, which was built up in the 1880s, peaked in 1887 only to burst in 1888. It was a frenzy fueled by fast-spreading and overly optimistic stories about the riches of high rollers – a contagion of speculation, price surges, and a resulting oversupply of homes.

The Florida land bubble that peaked in 1925 was the biggest real estate expansion during the first half of the twentieth century, spreading far beyond the sunshine state and ending with the onslaught of the stock market crash in 1929 and the resulting Great Depression. From 1925 to 1929, home prices declined a total of 31 percent, and the unemployment rate rose to 25 percent at the peak of the Depression. In later years, there were six cyclical production-peaks of new homes (1963, 1972, 1978, 1986, 1998, and 2005) that were soon followed by busts. The United States also suffered severe periodic banking and trading crises, starting as far back as 1775.

Over a period of 233 years (1775-2008), thirty-one financial sector crises (or boom-bust cycles) have hit the United States, an average of one every eight years. In some sense, they seem the inevitable result of the country’s vast land area, which encouraged speculators to take excessive risks. Coupled with extreme and unregulated capitalism, the system often bred illogical enthusiasm for quick profits.

As such, future financial shocks are assured. It’s part of the American existence. Although very few people know when or how the next crisis will hit, it could be related to the Internet (thin cyber-attacks), war, environmental disasters, European sovereign debt defaults, a massive sell of a Treasuries by the Chinese, a commodity-price crash, or the US government’s daunting fiscal challenges. It’s impossible to accurately predict how these ultra-complex and interrelated factors will play out in the future.

Technology played a vital part in delivering the economic and cultural good times that most of America enjoyed since the 1920s. Henry Ford blazed the way with his Model T, selling more than fifteen million of them by 1927. The automobile’s popularity and the construction of roads and highways – pouring fresh public funds into the economy – brought tremendous economic prosperity and a new love affair with spending. Canned foods, ready-made clothing, and household appliances, for example, liberated women from much household drudgery. The influence of Ford’s methods of mass production and efficiency also enable other industries to produce a huge variety of consumer appliances.

After World War II, there was a boom in general aviation, both private and commercial, as thousands of pilots were released from military service and many inexpensive war-surplus transport and training aircraft became available.


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