Stock Investment Site

The Housing Bubble Mentality

A fit of media-induced hysteria has struck many normally rational Americans. According to those who believe in the housing bubble, the sky is falling, the seas are melting away, and the world is about to end yesterday. Bubbleheads claim to have analyzed the housing market with a sharp eye and reached an apparently logical conclusion that growth is unsustainable. How can two sets of people look at the same facts and reach conclusions that are at a direct opposite?

The answer lies in the human condition of gullibility. Why did people buy Nasdaq dogs at the height of the dotcom bubble? Why did those same people sell at the bottom in a panic right after 9/11? Bubbleheads would have you believe that they are the smart crowd this time around. In fact, the exact opposite is true. The people negative on housing today are the ones who bought CMGI, CSCO, INSP, and hundreds of other speculative junk stocks right before the market crash in early 2000.

Backward Bubblehead Logic

What was the prevailing attitude of speculators buying dotcom stocks before the crash? “Look at how much the market went up in the past, I better buy because stocks are going up!” Likewise, people sold after 9/11 for no other reason than the fact that stocks had declined in recent past. Now we have the media trying to tell us that housing is going to decline in the future because it went up in the past.

On the surface, you might think the bubblehead argument is a logical conclusion given the above recent events. What comes up must come down, and what goes down must come up, right? WRONG. Investments that crash may never recover, and investments that rise in value rapidly may never come back down to earth.

If you transported a bubblehead back in time to the year 1988, he might decide that shorting MSFT (Microsoft) stock would be a genius maneuver. After all, MSFT had doubled several times in the years prior to 1988, so it was due for collapse. Fast forward to 2006 though and that bubblehead is something like 3000% in the hole due to his stupidity. So what went wrong?

The Rule of Bubbles’s Rule of Bubbles: When you judge the future return of an investment based upon its past returns, you will likely forfeit a large portion of your wealth. This rule holds true in both directions: Saying that an investment must go down because it went up yesterday is just as fallacious as saying that it must continue going up because it went up yesterday.

Investors judge the value of an investment by its intrinsic value. This article convincingly lays out the case for the non-existence of the housing bubble. Falling interest rates in the near future coupled with high demand for limited resources and increased access to borrowing all point to a housing market that has not yet peaked. In most regions, housing is currently undervalued despite the fact that prices have risen in recent years, just as MSFT was undervalued in 1988.

As with any investment, it is important to look closely at the fundamentals and draw a conclusion based upon facts. In this case, facts are on the side of those who remain upbeat on the housing market. There is a direct correlation between the bubbleheads of today and the dotcom pumpers of 1998-2000. Selling your home today is akin to buying CSCO at $140 per share.

Article by Ninjak


Investor Elite
Housing Bubble
Brokerage Reviews
Stock Trading
Other Investments
Newbie Investors

Yahoo Finance
Wall Street Joutnal
The Economist
Charles Schwab


Copyright © InvestorElite 2005. All Rights Reserved.