The Real Estate Bubble

I have for several years felt that one of the biggest threats to the current economy is the housing market. And there have been several cover stories on the economist about how the real estate market is a dangerous bubble.

The economist came out with yet another cover story talking about this housing bubble (June 18th 2005). Already, Australia, Great Britain, and The Netherlands have seen falling real estate value.

Let me start with the first sentence of the final paragraph of the article.

The whole world economy is at risk

That is a powerful statement. The Economist is not known for being reactionary, but it is known for being right. And then, the article goes on to say

The housing boom was fun while it lasted but the biggest increase in wealth in history was largely an illusion

That's pretty sad. And not only has there been a huge increase in wealth that's not even real, but the people who have acquired that wealth have already spent it (on SUV's and stuff).

I have been unable to understand why the housing boom has continued. Can't people see that it is a bubble? And yet all my friends buy houses and think they are going to make a ton of money on them. I tell them they are crazy. They go ahead and buy them, the prices continue to up and they make money on them. But, the economist says:

Throughtout history, financial bubbles--whether in houses, equitites or tulip bulbs--have continued to inflage for longer than rational folk believed possible.

I feel vindicated. Rational folk see the bubble. Markets aren't rational. That's why bubbles exist. That's why pyramid schemes work.

If people were rational this bubble would have popped long ago. So now there is another article on CNN's Money web site.

http://money.cnn.com/2005/07/01/real_estate/us_housing_market.reut/index.htm

That article is discussing the very same thing. In that article we learn that the effects have a housing market correction are more pronounced:

"The output loss associated with the typical housing price bust (about 8 percent of GDP) was twice as large as that associated with a typical equity price bust," the study said.

Hang on. This could be a rough one. I hope they are wrong.