THE REAL ESTATE ROLLER COASTER

I came across a great web site recently that I wanted to share with all of my Alert readers. The site is speculativebubble. The site’s creators put together a "virtual roller coaster ride" that tracks real estate prices since 1890. I invite any of you even remotely interested in home prices to check out this fun little journey. As you’ll discover, the road in real estate has been anything but straight up over the past century.

Depicted graphically in the chart below, we can see how home prices have gone through many boom-and-bust cycles.

What is frightening is the severely elevated valuations we currently are seeing. Can we really expect, by historical standards, that prices are going to keep climbing unabated forever?

This chart can be found in Robert J. Shiller’s great book, "Irrational Exuberance." In this seminal work on market cycles, Shiller indicates that during every speculative bubble there always was widespread consensus that high valuations were justified by each market’s special circumstances.

He also found that every large market correction seemed to result from popular consensus rather than specific events or news. Shiller says that past bull and bear markets, though often based initially on sound fundamental reasoning, fed upon themselves to go beyond what the facts justified. He challenges the efficient market theory — demonstrating that markets cannot be explained historically by the movement of company earnings or dividends.
Is the real estate market the next big market bubble? History certainly seems to support that view.

To order Robert Shiller’s "Irrational Exuberance," click here.