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Bubbles
Old 06-01-2005, 12:58 PM   #1
 
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Bubbles

Any good contrarian knows that bubbles pop when almost everyone is saying how great the market is. When "you can't lose!" and "The sky's the limit" are the things you hear from everyone, that's when you expect the bubble to burst.

Right now, one does hear about how great the real estate market is, but you also hear a lot of "Lookout, we're in a bubble and it's going to burst!"

So here's my question: Back in 1999 and early 2000, was there this much "Lookout the bubble is going to burst!" talk concerning tech stocks?
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Re: Bubbles
Old 06-01-2005, 01:18 PM   #2
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Re: Bubbles

Some people warned of the danger. Tech popped because corporate IT spending fell off of a cliff after the Y2K bug was discredited. I don't see anything that would pop real estate in the near future, but one day the coasts will probably lose a bit of home value.
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Re: Bubbles
Old 06-01-2005, 02:03 PM   #3
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Re: Bubbles

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Originally Posted by Michael
Some people warned of the danger.* Tech popped because corporate IT spending fell off of a cliff after the Y2K bug was discredited.* I don't see anything that would pop real estate in the near future, but one day the coasts will probably lose a bit of home value.
I think that the y2k bug actually extended the bubble if anything...
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Re: Bubbles
Old 06-01-2005, 02:31 PM   #4
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Re: Bubbles

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Originally Posted by Marshac
I think that the y2k bug actually extended the bubble if anything...
Only until 1 January 2000.

While the warning signs are everywhere, I think that overinflation explosions are still a year or two away. The real issue is avoiding all the pins being waved across the nation and the rest of the world-- one ugly unemployment report, a big whiff of inflation, $65 oil, one unexpected devaluation or default in a foreign currency, another LTCM, or anything else that sends investors running for a very narrow (leveraged) exit...
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Re: Bubbles
Old 06-01-2005, 02:38 PM   #5
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Re: Bubbles

You had a confluence of a bunch of things then. People were buying for the y2k fixes. A number of companies went to a 4 year depreciation schedule for a lot of their office equipment (from 3) and bought because their annual costs went down to fit the budget. A lot of companies were buying routers, servers, s/w and consulting due to fear of not 'being part of the internet wave'. Everyone created a substantial internet presence. It was a perfect storm of buying.

And yep, plenty of people were waving red flags. It appears to me there are some similarities. Back then some people made up excuses and came up with many reasons why the high prices/valuations were ok or didnt matter. None of them really made sense to me. At some point it simply comes back down to how much money are you making, how much does it cost you to make that money, how volatile is your business, and how good is your management team. Period. You had some people pointing these things out over and over again. When portfolios were going up in triple digits, nobody wanted to listen. But the tide does eventually turn.

Today we have people making the same excuses for high RE prices. And the same sorts of people questioning the excuses.

Looking at my situation, I'm sitting in a house that costs $175k to build new, is ~8 years old, and from that has a land valuation of $225k plus the depreciation on the home. A quarter acre in a moderate crime, high unemployment, high welfare, low fru-fru stores and restaurants area thats an hour drive from the nearest decent size city, which is the capital of california but a lot of people never heard of it.

I dont think so.
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Re: Bubbles
Old 06-01-2005, 02:53 PM   #6
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Re: Bubbles

There was a lot on the subject if one were to read deeply. I remember reading The Economist which said this was a bubble for a long time , maybe 2 years, before the market finally crashed. So the question becomes not whether we are in a bubble but when it will burst or when are we at the top of the market.
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Re: Bubbles
Old 06-01-2005, 03:09 PM   #7
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Re: Bubbles

Quote:
I think that the y2k bug actually extended the bubble if anything...
Yes, and magnified it tremendously. However, it had a well defined time limit. Real estate over pricing has no similar time limit. It can go on until some outside event wakes people up to the danger in what they are doing. The date of its demise will not be so easy to predict.

Bubbles can go on a lot longer, and higher, than most people expect. That is how so many people get roped in. They see it is high, and expect an imminent fall. When the fall does not come as expected, they feel left out and try to get in quick to make some of the fabulous profits that they see others reaping. Human nature doesn't change.
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Re: Bubbles
Old 06-01-2005, 03:18 PM   #8
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Re: Bubbles

I think the bubble has a measurable limit.

When two moderate to high income prospective homeowners cant own the average home in their area even with a 40 year or interest-only loan, the boom in that area is over. Or to take it from another angle, when mortgage companies are writing mortgages that are well outside the range of ordinary earning/debt load levels.

I think we're pushing that in some places...looks like the "this is nuts" example of the two $100k a year earners barely squeezing into a san jose area home with a percentage of their income thats well over most usual mortgage standards says its about over there.
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Re: Bubbles
Old 06-01-2005, 03:35 PM   #9
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Re: Bubbles

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Originally Posted by th
I think the bubble has a measurable limit.

When two moderate to high income prospective homeowners cant own the average home in their area even with a 40 year or interest-only loan, the boom in that area is over.* Or to take it from another angle, when mortgage companies are writing mortgages that are well outside the range of ordinary earning/debt load levels.
Yup, I think I've heard this termed "exhaustion." The housing affordability index in CA, for example, is at an all-time low. It's a little lower than it was last time the real estate bubble popped in 1990. Eventually, you run out of buyers for the overinflated goods/stocks/tulips/whatever.
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Re: Bubbles
Old 06-01-2005, 03:37 PM   #10
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Re: Bubbles

As much as I think it will pop, I sure hope it doesn't.... the hangover from this credit high will be brutal.
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Re: Bubbles
Old 06-01-2005, 03:40 PM   #11
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Re: Bubbles

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Eventually, you run out of buyers for the overinflated goods/stocks/tulips/whatever.
You forgot "eyeballs".
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Re: Bubbles
Old 06-01-2005, 03:41 PM   #12
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Re: Bubbles

Good point, unless more creative financing comes along. *Politicians want prices to keep rising, as this maximizes the property taxes.

When people could no longer afford to buy new cars, the auto makers stretched out the loans, went with 0% interest loans, and then just leased the things. *I wouldn't be surprised to see more government programs to "help" people afford homes. This could prolong things a bit.
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Re: Bubbles
Old 06-01-2005, 03:50 PM   #13
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Re: Bubbles

I think you've picked out the good example: the car industry. They softened the financing and increased the warranties, now that the people who could afford principal only and were enticed by 5, 7 and 10 year warranties are fished out and they're stuck with inventory and lowering prices.

There ya go.

About all the politicos could do is increase the benefits of interest rate deductions or have them apply to more people, as in letting you take the standard deduction AND the mortgage deduction.

At some point you hit the end of the line though.
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Re: Bubbles
Old 06-01-2005, 03:53 PM   #14
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Re: Bubbles

Quote:
At some point you hit the end of the line though.
Yes, I agree. I just think it is hard to predict when.
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Re: Bubbles
Old 06-01-2005, 03:56 PM   #15
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Re: Bubbles

In California there are 427389 agents (1.9% of the working population), and 601,800 houses were sold in 2004, or about 1.41 homes per agent. With some areas experiencing double-digit sales volume decreases, you can bet that a large percentage of those agents are without homes to sell..... and then there are the banks, brokers, title companies, etc.

As an aside, there has got to be some sort of multiplier to determine how much economic activity is produced as a result of every $1k in home sales. Any ideas what it could be?
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Re: Bubbles
Old 06-01-2005, 03:58 PM   #16
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Re: Bubbles

Watch the inventory of homes in the area you care about. When it starts rising, its time. When it starts shooting up quickly, its done. When it starts dropping because people dont want to have to sell at "reduced prices" and start withdrawing properties from the market its all over.

Then its just a matter of how far it falls and how long it takes. Probably a few 'dead cat bounces' when the prices dribble down to the point where fence sitters with no brains can afford them again on the 40 year and interest-only loans, after which it'll slide again.
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Re: Bubbles
Old 06-01-2005, 03:59 PM   #17
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Re: Bubbles

Number of agents is a bad stat. Half the people I know got a realtors license. Its something like $400 and a six week course taken a few nights a week. I was thinking of getting one so I could act as my own buyers agent and get the 3% fee the next time I buy a house. Particularly since I found the last two homes I bought, not the agent.

My last buyer was a doofus. He had a realtors license and acted as his own agent. Didnt know crap, so my realtor (the selling agent) ended up helping him do most of the paperwork or do it correctly. He insisted on being paid the 2% buyers agent fee even though I offered to sell him the home for 2% less. "I have to make a living too" he kept saying, and didnt seem to 'get' that he was going to pay income taxes on that 2% and then pay a slightly higher property tax amount every year for the term of ownership.
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Re: Bubbles
Old 06-01-2005, 04:07 PM   #18
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Re: Bubbles

Also, a number of states require people who manage rental properties to have a real estate brokers license.

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Re: Bubbles
Old 06-01-2005, 04:11 PM   #19
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Re: Bubbles

Quote:
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He insisted on being paid the 2% buyers agent fee* even though I offered to sell him the home for 2% less.* "I have to make a living too" he kept saying, and didnt seem to 'get' that he was going to pay income taxes on that 2% and then pay a slightly higher property tax amount every year for the term of ownership.
Typical american.... live for today. The sad thing is that he still probably tells all his buddies how he 'made' 2% on buying his house. :

Good point about the # of agents being misleading.
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Re: Bubbles
Old 06-01-2005, 04:11 PM   #20
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Re: Bubbles

Quote:
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