We’ve all been talking about the real estate housing bubble for years now. I thought it might be appropriate to look back at some of the mistakes people made in an effort to averting a similar crisis again in the future.
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The 5 Biggest Mistakes Made By Real Estate Investors During the Housing Bubble
- Forgetting about the past – This is probably the most amazing mistake! As we all know, history tends to repeat itself. By not learning from history we deserve our fates. The dot-com bubble in the stock market took place less than a decade ago. People lost their pensions, retirement, homes, etc. during the bursting of that bubble, yet investors didn’t remember that what goes up exceptionally fast must come down.
- Irrational Exhuberance – Take a look at the image in my previous post about irrational exuberance from back in August 2006. It doesn’t take a brain surgeon to see that the market was WAY overinflated! All anyone could talk about for a few years was how much money their homes were worth and how much they could make buying property. Investors got lost in the hype and forgot about what is most important . . . which leads me to my next point:
- Ignoring the Numbers – It is hard to ignore all the hype and buy a property based on proper evaluation when you see every property in the country rising at an astronomical rate. This was a fatal flaw for tens if not hundreds of thousands of investors. They ignored what is most important, the numbers, and bought properties on nothing but hope.
- Becoming Emotionally Desperate – Desperation leads people to do stupid things. When everyone around you is in a frenzy, what do you do? Remember the days when properties went on the market and had 10 offers by that night? I do. Bidding wars are lose-lose situations for investors. They are powered by emotional attachments, and not by any realistic accounting for a property’s worth. Fear that the market will climb forever and that you’re missing the boat is not a reason to invest. Slow and steady people!
- Becoming Greedy – I sold a condo back in 2003 after it had almost doubled within three years. At the time I sold it, the property was way overvalued and I gladly got out. By 2006 it had more then doubled in price over what I had sold it for. While I think about what could have been, I’m glad I got out. My analysis was correct, and as I write this, the price of the property is falling back down to where it was when I sold it. Greed is a terrible thing; it blinds you to reality. Too many people complain about the losses they are taking. Had they sold their properties and taken their profits earlier on, they would not have anything to complain about. Those investors who purchased near the top of the bubble at crazy prices simply got greedy. No market will go up forever. We all know that these things are cyclical. When greed takes over, disaster can soon follow.
I’d love to hear any other theories about the top mistakes made by real estate investors during the housing bubble. Feel free to share them with us!
This post is part of Problogger’s Top 5 Group Writing Project.