The Housing Bubble III: Pop! August 20, 2005
Take a look at this chart and tell me there's no housing bubble, and that real estate can keep on rising indefinitely. What the chart reveals is that over-investment in housing (as measured by investment per worker) is inevitably followed by a recession.
The two exceptions which prove the rule were the Korean War and the Vietnam War, which goosed the GDP by 15% and 10% respectively, pulling the economy out of the recession which would have otherwise taken the economy by the throat.
The glaringly obvious point is that the present level of over-investment is unprecedented, suggesting that the ensuing recession will be deeper and longer than previous over-investment/recession cycles. It's worth noting that the last "real" recession--that is, one that lasted more than a few months--occurred 25 years ago. That's an awfully long run of expansion.
The chart's upward trajectory since 1990 has a eerie, if not downright frightening, resemblance to the
parabolic rise of the NASDAQ stock market 1997-2000. As we all know, the NASDAQ subsequently plummeted 80%.
That couldn't happen to real estate, the yammering industry bulls yelp; maybe so, but what about a 40% drop?
Check back in 2010 and let's see where valuations are then.