Wednesday, May 25, 2005

Is There a Real Estate Bubble?

Is there a real estate bubble in the US? Beats me! But I think it is possible to draw some conclusions from the fact that so many people are worrying about one.

First of all let's get our history straight. I know of no "bubble" that has burst while so many experts were telling people how inflated the bubble was and how the bubble was doomed to burst sooner rather than later.

But today the New York Times ran a page 1 story above the fold with the headline "Steep Rise in Prices for Homes Adds to Worry About a Bubble". A few days ago the Wall Street Journal ran a story in the "Capital" column by David Wessel with the headline "The Fed Starts to Show Concern At Signs of a Bubble in Housing". The May 30 issue of Fortune had as its cover story "Real Estate Gold Rush".

What I find so interesting about this phenomenon is that the word "bubble" nowadays has a very negative connotation, one that has resulted from the recent collapse of the dot com and telecommunication bubble stocks during 2000-2002. The word "bubble" is like the "bloody shirt" that tabloid newspapers used to wave to arouse war sentiment among the public. In my view the constant use of this term is a reflection of underlying negative attitudes, not just towards real estate but also towards financial assets. People just want to be scared. And the press satisfies popular demand by scaring its readers with the constant references to the real estate "bubble".

I draw two conclusions from this phenomenon.

First, real estate prices are not going to stop going up anytime soon. My best guess is that the (temporary) peak in real estate prices will occur just about the time the US economy starts to slip into its next recession. My 2005 stock market forecast predicts a stock market top for late this year, so I would expect the economy to peak around mid-2006.

Second, bearish attitudes towards financial assets are so prevalent that I doubt that the next bear market (in 2006) will be very severe. Probably it won't drop stock prices more than 25%. And the subsequent bull market will almost surely send the stock market averages to new all time highs by a substantial margin.

Don't let yourself be frightened by the bubble bogeyman!

1 comment:

Jack Miller said...

You are right on about the point that there are too many looking for the bubble to pop. By the time it pops, many will have capitulated. They will say they were wrong in 2005 when the picked the top because ...

Chances are the idea that the boomers have 5 more years of buying before the peak will be the conventional wisdom when the peak arrives.