We humans have an incredible inability to see bubbles when we’re in the middle of one. They seem to make rational sense in a strange sort of way. At least some highly educated people can speak at length about why the value should be so high. They can explain the science behind it.

It’s hard to believe that people thought tulip bulbs would be the path to riches. But in 1636, valuations went into the stratosphere, only to come crashing down in 1637. At the peak, some tulips were worth 10 times the annual wage of a single worker.

After a long period of real estate prices increasing, of rents increasing, and of prices increasing, it’s easy to become conditioned into thinking that prices only go up. Rents only go up. Salaries only go up.

But they don’t. We’ve seen periods of time when rents went down. We’ve seen prices fall. We’ve seen incomes fall. In each of those cases, there was an explanation as to why that happened.

It’s too easy to look back at history and explain away what happened. That will never happen again.

Bubble Headed Thinking

by Victor Menasce | Real Estate Espresso Podcast