Friday, July 08, 2005

The Value of Housing Skeptics

In John Galbraith's book called 'A Short History of Financial Euphoria' he talks about historical bubbles ( roaring 20's, tulipmania, the 1987 stock market crash). He eloquently writes that the remedy to bubble markets is an:
"enhanced skepticism that resolutely associates too evident optimism with probable
foolishness"

We skeptics are a valuable tool in stopping this bubble from getting any larger. The larger the bubble the larger the bust. Ben Jones and his Housing Bubble Blog are indeed positive restraints on rampant speculation. Thank you.

9 comments:

  1. I recently read Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay. He also writes extensively about the tulipmania. It is amazing to hear the similarities between the tulipmania and this real estate bubble.

    Thank you for the daily dose of skepticism. I hope it is contagious.

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  2. All bubble booms are alike, all bubble busts implodes in their own hideous way.

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  3. "Extraordinary Popular Delusions and the Madness of Crowds "

    I want to read that. :-)

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  4. Ok, I think this blog (and others of its ilk) might have too much euphoria about the bubble bursting. It seems like there is not enough skepticism about the "horrible, catastrophic, distastrous, etc." effects about the bubble bursting? Yes, housing prices are overvalued in some markets, and a lot of speculators are going to lose $$ when prices decline (or fail to rise as they expect). But this is not tulipmania. A house is a real thing, it provides shelter, workspace, living space, multiple and versatile economic opportunities (renting, storage space, growing pot in the closets, you name it) that are not going to be wiped out by a housing bubble bursting. Many people, especially speculators with risky mortgage products, may be in trouble, but overall the housing market is not going to crash like tulips and is certainly not going to cause tons of ripple effects that will destroy the world economy. In some markets, prices will probably go down, but in others they will just stagnate until incomes rise to support more regular increases in valuations.

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  5. I thoroughly agree. A house is inherently more valuable than a tulip bulb, and a crash in the real estate market will not have the devestating effect that tulipmania had. However, it seems to be the same sort of public delusion that fuels both bubbles. It is interesting to see where the optimism of a "bubble mentality" has lead in the past.

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  6. "but overall the housing market is not going to crash like tulips and is certainly not going to cause tons of ripple effects that will destroy the world economy. In some markets, prices will probably go down, but in others they will just stagnate until incomes rise to support more regular increases in valuations."

    Agree about the selective markets comment, I do think decrease vs. stagnation will be locally based. But downturns - if somewhat severe as in 25% or greater - will likely have an undue negative impact on the non-bubble markets in terms of price retreats. Not a severe one, but probably below the regression line.

    The economic impact, however, is likely to be greater than the tulips because of the nature of the commodity and its importance to people. Tulips, as with stocks, were disposable income investments for the most part. Housing is not. Impact of gains/losses are more widely felt, therefore. Given a wide enough downturn, it could have a grave impact on economy as a whole. And by wide, I don't mean 80%, I mean 40%.

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  7. evermore,

    "a house is inherently more valuable than a tulip bulb"

    I agree 100 percent.

    Anon 10:38

    "and is certainly not going to cause tons of ripple effects that will destroy the world economy

    It won't destroy the world economy. Agree. There will be many ripple effects. The US economy is on weak standing due to other factors (high energy prices, war costs, debt / deficit, offshoring, trade defcit, consumer debt), so when the bubble bursts in the bubble markets the whole US economy is most likely going into a recession. I wish the US economy was on a better foundation. The cold reality is that there are huge structural problems facing the US economy. A dip into another recession is pretty much inevitable within the next three years.

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  8. Evermore said:
    'It is interesting to see where the optimism of a "bubble mentality" has lead in the past.'

    I couldn't agree more.

    I favor a sense of healthy skepticism and enjoy a dose of it here.

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  9. Hey evermore and the rest:

    Too much euphoria in the direction of the bubble bursting? Sure, there's always euphoria in both directions. When a bubble is bursting, people have an irrational fear of that investment class just like they had an irrational euphoria towards that same investment class. This is well documented through financial history. And your point is...? Nothing about this housing bubble is fundamentally different from any other bubble. I've been doing this for 40 odd years now and this bubble is like all the rest. Also, currently, talk of bubbles bursting is still the minority opinion.

    Some quotes:
    "A good investor walks a lonely road" (Marc Faber). A good investor is buying when everyone else is begging to sell, and selling when everyone thinks the only direction is up.

    "To make money, you have to be greedy when everyone else is fearful and fearful when everyone else is greedy."
    -- Warren Buffett

    "You can lose a lot of money by selling too late. So can you make a lot by selling too early. A simple investment formula, based on effluents and body fluids: Be a seller when money is coming out the wazoo; be a buyer when blood is running in the street."
    -- Some one at The Daily Reckoning

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