The Housing Bubble

I was recently at an event where everyone was talking about real estate. It reminded me of Joseph Kennedy, father of John, and how he decided to pull out of the market before the crash of 1929.

The story goes that Joseph Kennedy pulled out of the stock market right before the big crash of 1929 (thus saving the family fortune) when he was given advice by a shoe shine boy about some hot stocks, US Steel and RCA. Joseph Kennedy correctly reasoned that if the every-day joe was in the stock market and felt confident to give advice that a bubble must exist and that was no place that he wanted to be. The stock market crashed two days later.

Everyone at this event was convinced the housing market could do no wrong. They were talking left and right about how how they really couldn't afford it but with some creative financing they could make it work. Of course I pointed out to them the inherent risk in such financing but everyone was convinced that the at worse housing prices would remain flat and not drop and that interest rates would stay low.

Many know that even though I could afford a house I have thus far stayed out of the market for fear of a price correction that I strongly believe is coming soon. I believe that the stock market bubble we experienced in 2000 was replaced by the housing bubble as people poured their capital into their homes. The strong economy, bolstered by home refinancing, can not be sustained when the savings rate in the U.S. hovers around 0.1%. There is no free lunch. Sooner or later all debts must be repaid and the United States continues to rely on foreign financing to sustain its consumer lifestlyle.

Yeah I know, all the experts have been predicting doom and gloom for several years and nothing has happened except housing prices continue to rise. Remember, it was 4 years after Greenspan declared a bubble in the stock market before it burst, it didn't mean there wasn't a bubble when he first declared it. People lost trillions of dollars and many a retirement was put on hold. For sure, Housing is a different beast, not nearly as liquid as a stock. Then again, that causes its own problems. I wish all my friends who are new home-owners luck, I just don't have the stomach for a ride like this.