Financial Bubbles Take Years and Sometimes Decades to Overcome
Yes, let me repeat that....Financial bubbles take years and sometimes decades to overcome. When I say “overcome”, that does not necessarily mean returning to the glorious “boom times” of the pre-burst period, but rather to some level of price stabilization.
(photo courtesy of Pascal Terjan via Fotopedia) 
History has been filled with examples of these erratic conditions. Going back to the “Tulip Mania” of 1637” and the stock of the “South Sea Company” in 1720 to the “Stock market bubble of the Roaring Twenties”(and the corresponding Great Depression of 1929-the beginning of WWII), the Japanese asset bubble of the 1980’s, the “Dot Com” bubble of the 1990’s to the “current state of the world economy”....the world has experienced a multitude of financial “boom to bust periods”.
They have all been characterized by:
- Herd behavior;
- A belief that if prices have moved in a certain direction in the past, they are sure to continue to move in that direction in the future;
- If I buy an asset at an inflated price, there is a “greater fool” who I will be able to sell it to at a higher price;
Additionally, there is often a lack of concern over “moral hazard” because of actual or anticipated outside intervention (think “too big to fail") and an expectation that hyper-inflation will support the ever increasing prices.
Rarely is there an opportunity for participants to identify or take advantage of an active price bubble. To paraphrase the famous economist John Maynard Keynes...
”markets can remain irrational far longer than you and I can remain solvent”.
While we may see some housing markets “booming” at the moment, some that seem to be forming a bottom (which appears to be the case on the North Shore) and others still spiraling downward, there is a high probability that the ENTIRE U.S. housing market will continue to feel the effects of the bursting bubble for many, many years to come.
Prices may never return to the peak levels of 2005-2007....or they might? Think about the Nikkei 225 index high on December 29, 1989 of 38,957.44 (Friday close 8498) and the NASDAQ high of 5048 on March 10, 2000 (Friday close 2711).
As a result, we should not be encouraging buyers to purchase homes in order to make a great financial investment that will pay wonderful financial dividends over the years.
We have NO IDEA where residential housing prices are going in the future. Do you?
Maybe up?
Maybe down?
No way to really know.
We do know that home prices are considerably lower today than they were in 2006. We also know that the combination of greatly reduced prices and incredibly low interest rates make the cost of home ownership incredibly less expensive than it has been at any time in decades.
What we should be doing is encouraging our clients to find a safe, secure and comfortable place to live, raise their families and create memories. A place where you can take pride in ownership, develop friendships and pursue the life that you wish to live.
More so, you should purchase a home that you can afford.
THIS IS THE AMERICAN DREAM
If your property happens to increase in value between the time you purchase and the time you sell....fantastic!!! But don’t purchase with that as the primary goal because you might be deeply disappointed.
What do you think?
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