And the Bubble Gets Larger and Larger and Larger
Up, up and away — home prices soar / Bay Area median for resale houses hits $569,000 “Everyone who looks at the market says the price acceleration can’t last, but real estate agents and other experts said they expect a gradual leveling rather than a bubble bursting.” This is the ultimate last justification for people when they knowingly pay for an over valued asset. “Yeah, I don’t expect those returns anymore, but it will probably just level off.”
When the Nasdaq was at 5000 did you see stock brokers calling for 1,500? No. What they all said was “yeah it’s probably over valued, you might see a 10% decline or so.” Folks, stock brokers make money getting you to buy stock. Real Estate Agents make money by getting you to buy real estate. Frenzied markets create the most transactions. When the market declines people freeze and do nothing. Always consider the economic incentive of who is giving you advice and ask yourself if that advice might be influenced by their economic incentive. Always remember the story of Henry Blodgett who told investors to buy horrible stocks in public while telling other folks in private that they were bad investments.
For a dose of reality from someone who is not getting paid commissions on real estate check out the Los Angeles Times’ take yesterday.
“She just had 22 offers on a small two-bedroom, one-bathroom house in Oakland’s Laurel neighborhood. It went for 33 percent above the $419,000 list price.” Fundamentally ask yourself, why is this property worth 33 percent more after above average year over year gains? Are people making 33% more money? Are there 33% more people in the Bay Area over last year? Scarcity of Bay Area land is the other rationalization that keeps popping up as well. As though the scarcity situation were any different last year.
“In 1990, the door slammed shut with no warning, and we went through several years of declining prices,” Underwood said. “This will probably be more gradual than a door slamming shut.” In 1990 in Los Angeles real estate declined about 30% in 5 years — a long, slow, painful decline with a much less significant bubble.