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Housing Bubble or Not?

February 16, 2006

by Charles Mizrahi

Having lived and invested through the last stock market bubble (the dot.com bubble that popped in March 2000), I want to share with you the way I see the housing market and the lessons we can learn from past bubbles.

The last housing peak in the United States occurred in 1989. I had just bought my house that I thought at the time was a good price. My wife and I planned to live in our home for the next 20 years, so we were not so concerned about timing the market, just finding a place to live and grow our family. A bit less than two years later, I went to refinance my 11% mortgage. My new interest rate was great, 8.5%, but the bank valued by house at about 20% less than what I paid for it. So much for the old saw about housing prices always going up.

I remember back in the mid- to late '80s it seemed that everybody was in real estate or at least doing it part time. Advertisements for courses to help people get their real estate licenses filled the newspapers. All the bullish arguments appeared to be sound, such as "they ain't making any more land" and that housing will continue, for the next several decades, to be the best investment class. You couldn't avoid hearing the latest and greatest success stories of novices buying a property one month and selling it while the ink was still wet on their contract and making a year's salary. Since I knew very little about real estate, I watched (with a certain amount of envy) on the sidelines. Recalling what Warren Buffett said about staying within your circle of competence kept me a bystander in the great real estate boom of the '80s. And then the party ended. The first Gulf War (1990-1991) took the wind out of the real estate boom's sails and it wasn't that much fun to talk about housing prices anymore.

The newly minted rich and famous real estate investors were now in deep trouble. Leverage was the drug of choice for many, and when prices stopped rising and the economy went into a mild recession, their house of cards began to crumble. You might recall that at that time real estate mogul Donald Trump threatened to sue Forbes because they claimed "The Donald" was bankrupt (if not bankrupt, he was sure having problems).

Based on what I am seeing and hearing in the fall of 2005 and the first few weeks of 2006, it seems that "everything old is new again." All the arguments that we heard close to 20 years ago about the eternal housing bull market are playing again. Last summer, when I went to the bike shop to buy a tire for my son's bike, I saw on the counter near the cash register the store owner's image on a business card. The business card showed him in a suit and tie with the title "Real Estate Broker" under his name.

I've learned that trees can't grow to the sky and asset classes can't maintain 20+% annual returns forever. Are we living through a housing bubble? I would say yes. Trying to figure out when it will burst is hard. People can stay greedy for long periods of time. My best advice at this stage of the game is to watch from the sidelines-you can't get hurt there.

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Charles Mizrahi is editor and publisher of Hidden Values Alert newsletter, which focuses on finding stocks trading significantly lower than their underlying business value.  He has over 23 years experience in the financial world as a money manager and investor. Email: charlesmizrahi@gmail.com, Webpage: www.HiddenValuesAlert.com


Rating: 3.3/5 (4 votes)

Comments

Bill Smith
Bill Smith premium member - 3 years ago
Bravo! I just came across this and saw the date of the article. I imagine you mentioned this to friends & associates. But I wonder how many were blinded by greed? Did you use any particular metrics to base your decision on real estate being in a buble or anecdotal evidence?

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