I sure got deja-vu all over again... Any tech stock owners from 2000 care to share their stories?
The housing bubble is now officially bigger than the tech bubble ever was. At the peak of the frenzy in 2000, consumer and business spending on tech software and hardware absorbed 6% of economic output. Today, residential construction takes 6.1% of output -- that's the biggest share of the economy devoted to housing since 1955. And remember, that was smack-dab in the middle of the postwar baby boom
Home-building stocks have quadrupled in price since 2001. That's almost as great as the runup in tech stocks from 1997 to the peak in 2000. Haven't we learned anything?
The housing bubble could well trace the same path as the tech bubble: A big rise that convinces even the skeptics to invest -- this time in real estate -- followed by a sharp decline that exceeds even the worst of fears. Just as the overspending on tech and telecom in the late 1990s set the stage for the big tech bust, the rapid pace of residential construction suggests that we could easily end up with a nationwide oversupply of housing, even if mortgage rates don't rise much.
January 05, 2006
BusinessWeek: Housing prices look like tech stocks at the height of the dot-com boom, so expect a nasty slump
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The similarities are almost too numerous to mention, but whatever insanity we are seeing here in the housing bubble, the tech bubble was far worse.
At the extreme end of house appreciation, I suppose we could entertain 5x over 10 years or maybe 2x in three years or even 1.5x in 6 months for some of flips.
That's still nothing compared to tech stocks. I can show you a dozen graphs from 1997-1998 where a stock went up 3-4x in six months and then tripled again in another six-month period in 1999-2000.
Imagine working for one of those companies -- one that made actual products before the internet (and still makes them today) -- and knowing that the stock price was rising on total BS day after day. Then imagine trying to make money on a short position. Remember the girl in that famous Kent State photo? That was me watching live stock quotes on my computer after reading yet another in an unending series of bogus mid-day "stock upgrades" sending my short position another 10% into oblivion.
That company and many like it went up 10x and more in three years and and some lost 90% of that peak value just as quickly. It was unimaginable before the rise that it could ever get so high, and unimaginable at the top that it could give it all back. Every cent! And still be the same company making the same products!
On the one hand, it will be impossible for housing prices to drop as quickly as stock prices. You can't "short" a house, and despite the best efforts of the mortgage industry, random minimum-wage earners can't be suckered into the housing bubble en masse a thousand bucks at a time.
On the other hand, even in the worst of circumstances (shorting at full margin) you could only lose 2x your original speculative money in the tech bubble.
That could indeed be a six-figure out-of-pocket loss, but $100K full-margin short sellers were certainly not the bulk of the victims of the tech bubble. Furthermore, once you were blown out, it was game over. Your broker simply would not process any more trades and your loss, devastating as it was, was at its maximum level.
The housing bubble will leave thousands and thousands of regular folks financially devastated. Their homes go "upside down", possibly (probably?) without them even knowing it. They won't get a call from their mortgage company as long as they are making the payments. But long before they will be forced -- via forclosure -- to throw in the towel, they will still have hope and delay the inevitable, worsening their already-negative position, by maxing out their credit cards, borrowing from friends, taking extra jobs, etc. By the time that foreclosure sale happens, their house price will have dropped another 10% and they're on the hook for that too.
And don't forget the new bankruptcy laws! The government knew exactly what they were doing when they passed that one, huh.
very good post.. sign in next time so we can watch for other ones of yours
one word for why I think this is bigger than tech: LEVERAGE
On a stock account, you're looking at 50% leverage. On homes, people are looking at 2000%+ leverage.
Any thoughts on the midwest? I kinda wish we'd had any kinda housing boom here, but nada. Housing prices have generally appreciated about 5% a year for the last decade.
I know we're not gonna bust, but I'd sure like to see some kind of boom someday. I suppose not being land-locked limits our opportunities for price inflation.
former db - welcome to the blog
it is easy credit that causes bubbles. it's tightened credit that ends bubbles.
35% to 50% in phoenix? What happened to 0% and 10%?
it's here my friend. the tightening. look next to the crackdown on neg. amm., no doc, 0% down and interest only loans.
less easy credit = less buyers = lower demand = lower prices.
econ 101
I think land mortgages (no structure) have always required more equity from the borrower.
And like he said, the banks ended up declining to finance at all. 100% down payment required!
Keith B,
"less easy credit = less buyers = lower demand = lower prices."
I think that says it all. By the way, great blog.
I keep hearing the negatives. The 4 areas i'm familiar with our still trending up. I don't need stats or realtor to tell me bubble or no bubble.
austin- up
socal-los angeles,oc,san fernando valley, ventura, santa clarita etc- all up
hawaii maui- up
salt lake city - up
All of these areas still are moving
up and plenty of buyers. no gloom and doom. alot of the socal areas have buyers with multiple families purchasing together and living together i've seen more and more of this the last 4 years.
2 or 3 years before we see any real drop in prices. The interest only holders will hold on for a while. Most of these loans we locked for 5 years starting back in 02,03,04, which means 07,08,09 due. I keep hearing rates are up, what rate, rates 30year and adjustables are real close to there lows but i keep hearing rates are up. Lastly i think the only issue is will foreigners keep buying our debt, thats the real question.
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