• 369 days Will The ECB Continue To Hike Rates?
  • 369 days Forbes: Aramco Remains Largest Company In The Middle East
  • 371 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 771 days Could Crypto Overtake Traditional Investment?
  • 775 days Americans Still Quitting Jobs At Record Pace
  • 777 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 780 days Is The Dollar Too Strong?
  • 781 days Big Tech Disappoints Investors on Earnings Calls
  • 782 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 783 days China Is Quietly Trying To Distance Itself From Russia
  • 784 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 787 days Crypto Investors Won Big In 2021
  • 788 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 789 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 791 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 791 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 794 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 795 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 795 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 797 days Are NFTs About To Take Over Gaming?
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

  1. Home
  2. Markets
  3. Other

The Great Transition, Part III: Sign of a Pop - Housing is Everywhere


Owning a home was once the foundation of the American Dream. Recently, it seems to have become a desperate national obsession, with prospective buyers frantically bidding up prices as though it were the end of the world. The whole thing is eerily reminiscent of the stock market boom that started in earnest 10 years ago, and culminated in the desperate rush to own shares - any shares - with the complete confidence that stock prices moved in only one direction. In spite of the recent denials by Fed Chairman Greenspan and US Treasury Secretary Snow that there is no housing bubble, the comparison of housing to stocks should be taken quite seriously.

If there is anything that we've learned from the political and financial roller coaster of the last decade, it is that the words of our leaders must always be scrutinized with the fishy eye of skepticism. In early April, Greenspan dismissed the notion that there could possibly be a national housing bubble. This from the man, mind you, who repeatedly stated prior to the Nasdaq crack-up that bubbles can only be seen in retrospect and that the best the Fed can hope to do is mitigate the fallout after a collapse. His recent statement was followed shortly thereafter by Snow, who also went on record stating that he did not believe American housing prices were overly inflated or in the throes of a "bubble."

The problem with these denials from our so-called leaders is that their positions of power effectively prohibit them from speaking bluntly about certain issues, namely the economy. Their job is to soothe and reassure the public that everything is just fine. If you understand this, then you understand that by simply addressing the issue, they have tipped their hand and revealed that we have a problem on our hands - a problem that they aren't quite sure what to do about. The fact that they deny the problems means that you can pretty much bet on its existence and its seriousness.

Just think about the lies that government leaders have been caught telling over the past decade, and think again if you want to trust the current denials about the housing market. You may think that to accuse the government of lying is rather impolite. On the contrary, it is impolite to tell lies in the first place. At the very best, they're trying to ignore the issue, obfuscate the truth, whistle their way through the dark and get everyone else to do the same. But if you want the truth about the issue, you're going to have to tune out their rhetoric, look at the facts, use your brain and think for yourself.

All of this - the government lies, the asset bubbles and the ensuing destruction of wealth - is part of the Great Transition we've been discussing in this five part series. This Transition is silently affecting everything in the world today. Painful as it is, an old order is crumbling away and we must adopt new rules to deal with that reality. To understand how housing fits in to this puzzle, first a little background on the current bubble.

Housing is Everywhere

Look around you. Housing is everywhere. It is not only the late night airwaves that have been taken over by baby-faced millionaires who made their fortune in real estate and are now pushing the idea onto insomniacs nationwide that "you can, too!"

Walk into any large bookstore and you will find that the investment section that was dominated by books on easy stock market profits five years ago has become a treasure trove for step-by-step how-to guides on easy real estate profits. Titles such as The Weekend Millionaire's Secrets to Investing in Real Estate, Are You Dumb Enough to Be Rich? The Amazingly Simple Way to Make Millions in Real Estate and dozens more like them make it sound so easy. And it seems that everyone knows someone who knows someone who's made a killing in the market and has three more deals in the works. Articles on housing, individual investors, and the state of the market are all over the popular press. All of the articles document the recent, rapid-fire escalation of home prices that is reminiscent of the "new economy stocks" that seemed capable only of unidirectional price increases just five years ago.

But all of this attention is fueled by a simple, undeniable fact. Nationwide, housing prices are rising, and they are rising fast. The market is partying once again like its 1999, and people think it's their last chance to buy a house, or make money on an investment, or secure their retirement, or they don't even know what they think, they are just caught up in the grips of the mania and they need to buy a house. There is no way that I can better demonstrate the folly of these ideas than to look back in time to show you a glimpse of the future.

Back to the Future

First stop, Nasdaq, December 1999. Back in those heady days they called it the Stock Market for the Next 100 Years. December 1999 was a time of Millennial fever, terrorist threats, the Y2K bug, but the Nasdaq shrugged it all off like a disinterested child with something better to do. By early December, the market had gained 50% in half a year. Nervous bulls suspected a top was near - just as nervous investors today suspect a housing bubble, (100% of the 72 voters in this week's website poll believe that the market is in a bubble - they only differ on when it will pop) - but it didn't stop many from continuing to "invest" and it didn't stop the market from rising to heights that were, to be blunt, insane.

But instead of collapsing, the market defied all logic and began a near vertical ascent though March that brought the Nasdaq to 5132, beyond everyone's wildest expectations. Any sane individual who expected an end to the madness was made to look like a fool, a pessimist, a doom-and-gloomer. The impressive performance allowed the market to suck in more suckers by giving off the air of invincibility.

The lessons for today's housing market are simply this: Just as in the Nasdaq's case, sane individuals are being made to look insane by this market. People know that it's a bubble of course, but they can't seem to stay away. The temptation to play along is just too great. A recent survey indicated that 63% of business owners believe there is a bubble in real estate. In spite of this, 42% felt that real estate would be the most lucrative investment in the near term, outperforming both stocks and bonds. These numbers indicate that investors have bought into a high-stakes game of chicken, trying to squeeze out the last few percentage points of return before the whole market blows.

Sounds eerily like Nasdaq 1999. And now just as then, it will be impossible to call the exact date of the top. Nothing goes up forever, and when things start to look the craziest, we know that the hour is getting late. But this is also when it feels the best: Everyone is drunk together, sharing in the same collective illusion and the party is rolling along full steam ahead.

Take a look at the chart, and the date, because that was the top. March 10, 2000. How could anyone have known? It was a perfectly normal day just like any other day. There was no extraordinary news, no plane crashes, terrorist attacks or invasions from outer space. The biggest news of the day went unreported. Everyone got up, went to work, watched the market go up, and then went home. The only difference was that, unnoticed by all, the market silently put in its top at 5,132 then like everyone else, turned around and headed for home.

Why did the market choose that day instead of March 9, or March 11? Why March, and not February or April, and why 2000 for that matter? Why did it top after an 86% gain in one year, and why not more, or less? There are no answers to these questions, but there is wisdom in thinking about them. It's almost like a Zen koan. After you have thought about it for a while, take a look at the charts below and remember (because you already know it) that as fast as a market can rise, it can fall even faster.

The Great Transition

So what does the Nasdaq bubble have to do with housing? All bubbles share the common thread of irrational exuberance. Optimism turns to greed, which then curdles, rots and spoils the market. Everyone needs housing, but when 25% of the market is controlled by "investors" - a polite word that the National Association of Realtors (NAR) uses to describe real estate speculators - something has gone amiss. The NAR states that one quarter - 25% - of all homes purchased last year were bought as "investments." Once the speculators crash the party and turn necessities into a game, true values are distorted and lost for the people who just want to do something old fashioned with their home - live in it.

In economics, as in life, all the interesting activity takes place at the margins. Twenty five percent of the market as speculators is huge. Just think of them as the day traders of yore, adding no value but simply pushing up prices, crowding out legitimate buyers and artificially inflating values, squeezing out money from pure emotions. But these investors aren't in the game for fun - their investments have to make profits. This can happen only one of two ways, either through rents or capital appreciation. There is evidence that rents are no longer doing the trick (it is much cheaper to rent now than to own), so in order for the speculators to make profits, more speculators - or legitimate buyers -- must enter the market. The greater fool theory lives on.

But note in the Nasdaq charts above, how quickly the market can go into retreat. Once the last marginal buyer has bought, the tide turns for no apparent reason and there is no looking back. Selling begets more selling as "investors" rush to lock in gains or cover their losses. As the marginal homebuyers disappear, the dynamic of the market shifts and prices reverse. Much has been made of the low inventory of houses on the market, and how this is "proof" that we're not in a bubble. I have a different perspective. People are likely hanging onto their houses, waiting for them to rise high enough to justify selling. They have an arbitrary, set price in mind at which they're willing to sell. But if they sense that the market has turned and their price will never be hit, sellers who have been sitting on the sidelines will rush their houses to market, putting more downward pressure on prices. This shift in the dynamic can take place, silently, without an obvious catalyst such as rising interest rates, just like it did on March 10, 2000 in the Nasdaq.

Any homeowner can call a real estate agent on Friday evening and have his house on the market by Monday morning, FYI. Undoubtedly said homeowner has an abundance of refrigerator magnets, rulers, pens, popsicle sticks (?) calendars and other useless knickknacks from agents who have stopped by recently trying to solicit business and stay "top of mind." Take your pick, this is a seller's market.

For now.

Just remember March 10, 2000. It was a normal day, just like any other day. Nothing special at all, except for that one thing.

Closing Words

This article has made a comparison between the current housing bubble and the Nasdaq stock bubble of five years ago. There is no guarantee that the housing bubble will play out in the exact same way, and in fact, it is likely that it will not. Perhaps this bubble will not go to the same extremes; maybe the extremes will be even greater. If you are looking to invest, just realize that you're playing a game of chicken. You may come out ahead, or you may not. Beware that the signs of a top are present.

If you own a home and have some nice gains, you may consider selling it. Another sign of a top in any market is that ownership changes from the strong hands to the weak, in this case from old-timers with lots of equity to greenhorns that are buying with no money down and are stretched to the limit to make their payments. Renting is not a bad option when you consider that you don't have property taxes to pay, don't have to pay for or do your own maintenance, and you can pocket your housing gains and have real money in the bank. Remember that the only reason that you "know" your house is worth a certain amount is because a neighbor down the street sold his house at around that price.

If you're a first time buyer, or looking to move up, ask yourself if you can really afford the house. Remember, you'll have to pay property taxes that will no doubt be increasing, maintenance for leaky roofs and busted pipes and all kinds of updates. Whatever you do, don't get an ARM or an interest only loan! Rates are going up, and there is no point in doing an interest only loan when you could rent cheaper. Do you want to own a house for a few years, only to lose it? Are you going to be stretched to the gills using both salaries, with no buffer for savings or emergencies? If so, you had better wait unless you want your life to be a living hell. There is no kind of stress that is worse than the stress and worry that comes from not having enough money to pay your mortgage. This is the American Dream turned nightmare. Once house prices turn down, your mortgage will be underwater and you'll be paying off a house that is no longer worth what you originally contracted for. On the other hand, if you wait to buy, you can take the time to save and invest, increase your nest egg and wait for housing prices to come down to meet you.

Finally, after all of the research I had done for this piece, and after staring at the Nasdaq charts for so long, I noticed a strange relationship. Some of the articles noted that houses have doubled in price over the last 5 years in many areas. By changing the time scale on the Nasdaq chart from 1 to 5 years, and simply adding two zeros to the price scale, a startling picture has taken shape.

This is not a predication, it is a scenario based on logic. What goes up eventually comes down.

Last of all, please do not take my word as gospel; I have no more knowledge than you when it comes to predicting the future. All I ask is that you think your decision through, and make your decisions based on facts and logic, not fantasies and emotions.

#  #  #

This is Part III of a five part series examining the opportunities and pitfalls of living through the Great Transition. Part IV examines the root of all bubbles: money in general and the U.S. Dollar specifically, while Part V examines some potential scenarios for the future. The other articles may be found here.

To be notified of future updates, please click here to subscribe.

Back to homepage

Leave a comment

Leave a comment