Bulls and Bubbles Are Not Synonymous

All I've heard recently in the financial media is that the housing bubble has finally burst. It's really quite comical. First of all, there was never a housing bubble. Everyone just threw around the bubble term because we had experienced one in Internet stocks a few years back and it was easy to categorize a very strong housing market as a bubble.

It's true that the housing market of the last five or six years was one of the strongest we have had in this country. The same can be said of the broad stock market from 1982 to 2000. We had the biggest equity bull market ever. However, it was not a bubble for all stocks, only one sector of the economy. Technology and telecom names fell by 90, 95, even 100 percent.

Outside of tech though, there was no bubble in stocks. The S&P 500 fell 50% when the "bubble burst" but the Nasdaq fell 80% and tech made up 30% of the index. As a result, half the S&P 500 loss was from tech stocks. Without the bubble, the market would have been down 25%. That classifies as a bear market, not a bubble.

Markets don't experience bubble every five or ten years. It's a much rarer phenomenon than that. People are also calling the bull market in commodities as a bubble. It's not. It's a bull market. Markets are cyclical and when they rise they do so very quickly, but bull markets and bubbles are not synonymous terms.

So, yes, the housing market is very weak, but let's stop saying how the bubble is bursting. The mean home price in the U.S. remaining flat for only rising 1 or 2 percent does not classify as a bubble bursting. Not even a 20% drop in housing prices on the coasts qualifies. That's just a bear market, which is what typically follows a bull market. When housing prices in certain markets fall by 90% or more, then we can start calling it a bubble. Not going to happen.

Comment on this article

Comments

[WC Whiner:]

You're right, that is, indeed, "[n]ot going to happen." Residential housing prices are not going to drop 90%. Then again, they didn't do that during the Depression, either. No, not that little post-'89 retrenchment, The Depression. Get back to us when your criterion can encompass the single worst US residential housing market in the last four generations.

FD: here are some data: www.bignose.org/~wcw/mortgage.pct.med... and www.bignose.org/~wcw/housfor.2a.png and www.bignose.org/~wcw/forsaleonly.sd.2... and graphics8.nytimes.com/...

2006 Sep 27 09:26 PM

[david otto:]

This fellow is totally wrong! the stock market bubble he describes is about investors who lost 50 - 100% of their investment. The home market bubble is on a similar path. They are both bubble markets.

The home market investor can easily lose 50 - 90% of their investment in a two year period that it took to lose 50 - 90% in the stock market from 2000 to 2002. In fact, many investments in real estate already have lost 50 - 90% depending on how much down payment equity they invested.

Anyone who bought a home in the last two years with 20% down can suffer a 50 - 100 % loss if their home value goes down 10 - 20%. Chad Brand is talking about home values - but conveniently skipped the value invested or equity value. Home values are financed by as much as 95%. the amount a home owner can lose is his investment Plus the amount borrowed. In fact, a 20% loss of home value may easily be 100% loss of equity for anyone who purchased a home in the last couple of years.

Without citing numerous other examples of how the comparison of a bubble in the stock market is the same as one in the housing market - just ask a simple question.

if an investor buys a home for $100,000 in 2005 with $20,000 down and the home depreciates 20% two years later in 2007 - How much of his investment does he have left?

The difference between a stock market bubble and a housing bubble is that in the stock market bubble you can't lose more than you have invested - but in the housing market you can. Other than that they are about the same. A 20% loss in housing value would be devastating to anyone who has purchased a home in the last couple of years, and anyone who purchased a home with little or nothing down has lost their equity and more.

2006 Sep 27 10:23 PM

[smitty sparks:]

Yeah, this dude is a totally wrong! He says:
"The mean home price in the U.S. remaining flat for only rising 1 or 2 percent does not classify as a bubble bursting"...
That in itself shows he is not keeping up with market data. Prices nationwide are dropping, not leveling off or flattening out! In some markets, prices have dropped as much as $80,000 from last year!

If you want the real news on the bubble bursting read the daily articles at realestatedecline.com

...and stop reading the garbage Chad Brand is spitting!

2006 Sep 28 01:31 AM

[Chad Brand:]

Actually, prices nationwide are expected to rise by less than 3% in 2006 and 2007, according to the NAR. Some areas are seeing drops, but the national housing market is not seeing price declines. Check their web site for current projections. Home sales in units are dropping, however.

If you are speculating in investment property, then yes, you can lose more than 20% since you are overly leveraged and your time horizon is brief, so your percentage return is poor. However, most people live in their houses and don't live in CA, NY, FL, or Vegas, so for the overwhelming majority of people, their house will not decline by a large amount. Hot markets could very well decline 20 or 30 percent, but that segment represents only a small sliver of the overall housing market, which is why median home prices remain steady.

Differentiating between a specific local market and the housing market as a whole is a crucial distinction. Silicon Valley's housing market was dessimated in '00 as layoffs mounted, but everyone else was unscathed.

2006 Sep 28 07:34 PM

[smitty sparks:]

Chad still doesn't get it. The price drops ARE NOT LOCAL. THE NATIONWIDE MEDIAN HOME PRICE HAS FALLEN and is falling further everyday. I repeat: prices are not "levelling-off" thay are falling and it doesn't matter that some goofy economist, who is probably facing foreclosure himself, says prices will not fall because he is already wrong! Pricea are falling EVERYWHERE NOW!!

Please read the news: realestatedecline.com

2006 Sep 30 01:28 AM

[Chad Brand:]

So the median home price fell 1.7% in August year-over-year. Is that really a bubble bursting? We'll see what happens from here on out, but the average American can withstand 2% declines pretty well, so it'll have to get a lot worse for most people to really be adversely affected in a major way.

2006 Sep 30 08:08 PM

[Daniel Houston:]

The author set this up so he could have an argument with readers about semantics. Read it over. His commentary contains nothing that can be applied to an investment or trade. The whole point of the article is to be confrontational by saying only declines of 80% constitute bull markets. Pretty immature considering the point of articles on this site are to add value, not fulfill the author's need for attention. The slew of 1 point ratings are well deserved.

2006 Oct 01 12:59 PM

[Daniel Houston:]

edit...bull markets = busted bubbles

2006 Oct 01 09:56 PM