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“The shares crash, hopes are dashed.
People forget,
Forget they’re hiding,
Behind an Eminence Front,
Eminence Front – it’s a put on.”
-The Who

Now that even Sir Alan concedes that there are bubbles in the real estate market the only question left to ponder is “what’s going to make them pop?”

Most people fear that rising long-term interest rates will be responsible for ending the housing boom. In my mind, what is even more likely is that the rise in the Fed Funds rate (ultra-short term rates) puts the hurt on all the floating-rate mortgage holders out there.

But I would also suggest something less obvious. I believe that most bubbles do not fall victim to some well-telegraphed, exogenous event. I believe that most bubbles are done in by the very same thing that causes them: in the immortal words of Pete Townshend, an “eminence front.”

Bubbles are created, not by any fundamental economic cause but by nothing more than hope and greed. This hope and greed creates a “front” of success or prosperity that draws in more participants with the same motives. This is why even blatant pyramid schemes continue to suck people in.

By definition, hope and greed, by themselves, are not able to create true and sustained success or prosperity and the “front” is eventually exposed for what it is.

So back to the question at hand: “how will the real estate bubble end?” My take is that it won’t be rising long-term or short-term interest rates. To quote the SEC’s dialogue on pyramid schemes, “eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.”

Now that everyone and their Mom has gone “all in” in the real estate game, it seems to me that the pyramid has already gotten too big. And the “eminence front” is very close to being exposed.