March 29, 2006

The Double Bubble - Dot-Com to Dot-Condo

It's becoming more and more obvious to HP'ers that the .com crash, which really was a credit bubble, never really stopped - the mess was just postponed a bit with a second bubble (still a credit bubble) - the housing bubble. Some pretty smart (and rich) folks have identified this and are positioning themselves correctly. Some really stupid people, let's just say ones who have never read an econ book, wouldn't know a financial bubble if it hit 'em in the face, are doing the opposite and charging full speed ahead.

The leverage used by day traders and housewives back in 1999 - 2000, where $5000 would get you $10,000 in margin, was replaced by absolutely MASSIVE leverage used by condo flippers (and housewives, and strip club managers, and 21 year old unemployed kids, and ...), where $5,000 would get you a $500,000 mortgage - an INCREDIBLE amount of leverage never before seen, never before available to humanity, used by an INCREDIBLE number of people.

This mother of all credit bubbles, represented by the double bubble of .com and now .house, is now
coming to an end, but too late to stave off the carnage to come. Now we'll see the ramifications, which we were supposed to see in 2001, but were delayed 60 short months, with 2007 being D-day.

Get ready. Get ready. It's here.

18 comments:

Anonymous said...

*.* (For the CLI users)

David said...

The recession is coming sooner. Late 2006.

David
Bubble Meter Blog

Mozo Maz said...

Seriously. Will historians remember this as the housing crash of 2006 or 2007?

2007 is more probable, since it seems like economists need LOTS of evidence to call a downturn. I rember the overall economy of late 1989 being very languid, no hiring, new customers hard to find. But the offical "recession" was not identified until mid 1990.

Similar situation in Y2000. The dot com mania was at its crest, but if you were paying attention you'd have seen many articles of layoffs and manufacturing losses. The NBER labelled this recession as starting in the spring of 2001.

But who knows. This bubble is unravelling quickly, because of it's extremity and the slow of information on the Internet. It could be the "Panic of 2006" -- kind of like the "Panic of 1893" (which I think was also based on land speculation.)

Mozo Maz said...

I'll amend my comment a little. The panic of 1893 was more currency based. The panic of 1873 was more railroad and land based. Check it out:

Panic of 1873

Anonymous said...

Citing a two-year-old article as evidence of what Peter Thiel is doing now is just silly. He might be doing the same thing--just use current evidence, not what he said three years ago.

brokersleaveyoubroke said...

It's bad enough that someone with 5k can get a 500k mortgage but then the mortgage broker sells the loan to a hedge fund. The hedge fund buys the mortgage with money they borrow from a bank. They borrow at low short term interest rates and buy loans at higher long term rates. It all works OK as long as there are very few mortgage defaults and short term interest stays low.

Wet_Chet said...

Rapid asset price increases are caused by flows of funds into a particular asset class. So the dot-com bubble was caused by a large flow of funds into tech stocks. Before the dot-com bubble burst, it was obvious to seasoned investors (not me), and many cashed out before the crash. Net flow of funds out of tech stocks = crash (or protracted bear market, as you wish).

At least some of those same investors who had made and protected their gains during that period could have moved into real estate. The loose money policy and high liquidity during 2001-2003 predicated the housing run-up. When that bubble became obvious (prices go parabolic, newspapers start reporting on it, the bagger at the grocery store is flipping condos), many cashed out (including me, thankfully).

Now where's the next big run-up going to occur (or likely already occurring, like precious metals and international stocks)? Where would you find the raw economic data to indicate it? The flow of funds reports from the Fed are too infrequent and too delayed to give a good indication. Anyone else have any ideas? I've noticed a lot of economically knowledgeable folks on this blog. Now, having successfully predicted the bursting of the bubble, it would be even more impressive to identify the next one.

(Note: I literally heard a bag-boy at my local Basha's grocery store talking about flipping condos. Fortunately, my wife's a realtor and we had hard data to back up our gut feelings).

Anonymous said...

I'm thinking of buying a condo right now in a surburb bordering North Dallas.

What do you think:
1632 sqft
built 1973
2 bdrm
2 bth
2 living
covered parking
small fenced backyard

$99,000

Do you guys think it is overpriced? Should I grab it now or wait for the bubble to pop?

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