The Market Bubble...., how did we know?

Real Estate Agent with KW Fayetteville

There sure is a lot of fuss out there about the bubble and all the mess left behind in the real estate market. At this point at least people admit that it happened. For the longest time there was this magnificent state of denial. I thought I spotted it pretty early but didn't have the conviction to tell anyone, not that it would have done any good anyway. What we all experienced was a bona-fide market mania, a phenomenon that is well documented in the history of the financial markets. It has happened again and again through out our existence.

In the 1600s the in the Netherlands tulip madness ruined a world power. The Dutch were an affluent people with colonies in the new world and a thriving economy. Tulips were pretty, in limited supply, and pricey. The flowers became a status symbol. Pretty soon one family was trying to keep with another, sending prices higher. It would have been no big deal just a simple supply and demand imbalance had carpenters stayed carpenters and blacksmiths stayed blacksmiths but it didn't happen that way. People neglected the productive industries of the nation to buy and sell tulip bulbs. At the height of the mania a single bulb could cost three times a years salary. People gladly the paid the insane prices for these "flower roots" because everyone was sure that they could sell for higher prices tomorrow. People sold farms, houses, livestock and other things that had real value to make a fortune in tulip bulb speculation. When reality finally caught up, the Dutch economy was so damaged that it could not afford to protect its interests and its empire was lost to the English and French. New Amsterdam which is today's New York and the rest of America might be speaking a different language today had the tulip craze not taken place.

In the 1920s the American stock market suffered a similar debacle. People started out sensibly buying solid companies with hard cash. Many did very well. After seeing the success of the Jones and many more people jumped into the market for a chance at the easy money. Soon people were using loans and margin to buy and sell stock. Again, just like in the Netherlands people Neglected the businesses That made the country function. In an 18 month period leading up to the crash the market doubled, a tell tale sign of a market bubble. People bought with no rationale whatsoever, but only that they beleived prices would only go higher. As with the tulip mania reality caught up and sent the United States economy into The Great Depression which lasted all through the 1930s.

In September of 2000 after the frenzied run up of prices during the dot com bubble the stock market fell costing millions if not billions in equity and actual dollars invested by regular everyday Americans. The real estate bubble is actually an extension of the dot com mania, its definitely related. The dot com crash led to the lowered interest rates that sparked the mortagage refinance and homebuying boom. Lowered mortgage interest rates brought payments down and in this day and age who cares about price as long as the payment fits. But prices can't keep going up. At some point the money runs out and reality has to kick in. Property absolutely has a "true" value and the market will always finds it.

So how do we know? The next time this happens, and it will happen, how do we recognize the signs? Even though its veryy difficult to recognize a mania when you're in the middle of it here are a few things to watch for.

 1. Everyone, even the so called experts, predict no end in sight. -Like the book by the NARs cheif economist, Why the Real Estate Boom Will Not Bust and how you can profit from it . This point makes it evident that we can't even depend on experts to recognize the warning signs. You'll hear them say "it's different this time", but it isn't.

 2. Businesses take more risks and abandon sound practices. -Even the well established lenders like Countrywide took on loans that defied years of proven lending principles. We are all watching in horror as that unfolds before our eyes. 

 3. It will seem like everyone is involved. -Think of all the hype about real estate, flipping, investing, and making a fortune. The books, the TV shows, late night infomercials selling courses, all of a sudden everyone is a real estate entreprenuer using risky techniques to aquire real estate. 

 4. Just bbefore the crash prices accelerate wildly and climax. -At the end of 2005 I met a broker from Arizona who told me that average time on market in his area was 8 hours or less and competing offers created a bidding war. Prices were rising with each new offer, multiple times a day.

In hindsight it all seems just crazy. How could we not see it, but then why should we be any more or less human than the generations before us. Many of us will probably recognize the next bubble or mania when it comes. Hopefully we will be able to do something about it.

Copyright Ron Allen, Fayetteville NC real estate agent  2007 All rights reserved

Ann Heitland
Retired from RE/MAX Peak Properties - Flagstaff, AZ
Retired from Flagstaff Real Estate Sales
Ok, maybe I'm still in denial. But I don't think it was a bubble. A normal cycle.
Aug 10, 2007 05:06 PM
Patricia Kennedy
RLAH@properties - Washington, DC
Home in the Capital
It was crazy then.  It's normal now! 
Aug 10, 2007 05:06 PM
Andrew Trevino
ADT Real Estate - Wilkes Barre, PA
Wilkes-Barre Homes For Sale
We never got a bubble in my market, but we are about 10 years behind the rest of the country. This has actually kept us safe and right now, things are actually looking pretty darn good. Thanks for the rundown, I learned something new about tulips tonight.
Aug 10, 2007 05:51 PM
delete me delete me
delete me - Dixon, CA
What crazy is all the stocks form the 2000 bust that lived to tell about it, are worth way more money now than they were back then...well not all of them, but the players like amazon, ebay, apple, those recovered very nicely...the housing market will too...
Aug 10, 2007 05:58 PM
Ron Allen
KW Fayetteville - Fayetteville, NC
Fayetteville NC homes
The stocks that made it through the crash all had strong underlying businesses. That's what makes a stock good to own. Like Andrew, I'm lucky because the Fayetteville NC homes market is isolated from the volatility and continues to remain stable.
Aug 11, 2007 02:02 AM