Well it finally happened. Time Magazine's June 12 issue has a cover story on the real estate boom in the US. This follows upon the heels of Fortune Magazine's May 30 cover story "The Real Estate Gold Rush".
Is the US real estate boom over? Is it a bubble that is about to pop?
Paul Montgomery originated the use of magazine cover stories as contrary opinion indicators in the early 1980's. His research showed that for a period of 1 to 3 months after the cover story markets tend to continue in the direction suggested by the story (in this case, upward). After that markets reverse course and move in the opposite direction.
But there are two important caveats to keep in mind.
First, bullish stories like these about the real estate boom generally are less accurate as timing indicators than are bearish stories. Greed is a more diffuse and less intense emotion that fear. So bullish stories often precede market tops by as much as a year. Moreover they give false indications much more frequently than do bearish stories. For an example of this see the September 20, 2004 Fortune cover on the US real estate boom.
The second caveat concerns the nature of the housing market. Houses cannot be bought or sold as easily as stocks and bonds. Moreover, most of the US housing stock is owner-occupied and so is held for the services it provides, not just as an investment. For this reason too a bullish story on the housing market is less likely to time precisely the top than one on some financial asset.
All in all I think that the real estate boom in the US won't cool down until the economy starts sliding into the next recession. My 2005 stock market forecast predicts a bull market top later this year. If this is correct then the economy won't start showing signs of weakness until mid- 2006.
The real estate boom will probably continue for another 12 months.
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