Wednesday, January 25, 2006

Housing Prices, Is There A Bubble?

Historical Price Bubbles share two common characteristics.

1) A precipitous, unprecedented, breathtaking rise in the price levels of the bubble commodity.

2) An equally precipitous, unprecedented and breathtaking decline in the price levels of the bubble commodity.

In order to consider the rise in home prices over the last five years as having formed a "bubble", home prices must meet the two common characterisitcs found in every past historical price bubble. Do they?

Over the last five years home prices in many parts of the country have risen substantially. In many places home prices have risen by well over 50%, and in some areas home prices have doubled. In a few places the rise has been even greater. Does this constitute a precipitous, unprecedented and breathtaking rise comparable to past financial bubbles? The last financial bubble was the tech-stock bubble of the late 1990's. Listed below are some of the stocks and how far they rose in price.

AMAZON - rose from $5 a share to $113. A rise of 22x.

CNET NETWORKS - rose from $4 a share to $80 a share. A rise of 20x.

CHECKFREE - rose from $6 to $125. A rise of 20x.

REALNETWORKS - rose from $4 to $96. A rise of 24x.

VERISIGN - rose from $5 to $258. A rise of 51x.

YAHOO - rose from $4 to $125. A rise of 31x.

Have home prices anywhere in the country seen anything like this type of appreciation? Have homes risen anywhere by 20x their previous price? In most areas homes have not even risen by 2x, let alone anything close to 20x appreciation. My own home has risen from the low $200,000's to the upper $300,000's. A tremendous rise, but still a far cry from 20x appreciaiton, which would see my home price rise to $4,000,000. Now your getting a sense of just how crazy all real financial bubbles are, including the recent tech-stock bubble.Clearly, home prices have not risen to anything approaching past historical bubble levels.

Here's what happened to the price levels of the tech-stocks listed above.

AMAZON - declined from $113 to $6 a share.

CNETNETWORKS - declined from $80 to below $1 a share.

CHECKFREE - declined from $125 to $7.

REALNETWORKS - declined from $96 to $3.

VERISIGN - declined from $258 to $4.

YAHOO - declined from $125 to $4.

In most cases the price levels declined to what they were before the bubble and in some cases even below that. Many of the tech-stocks that saw such spectacular price rises have simply disappeared, their value completely gone. Can anyone see the price of their home declining by similar amounts? My home would have to decline to under $20,000 to match the price declines listed above. Are any homes going to simply disappear and lose all value in the near future? Not very likely.

Home prices today might be overvalued, and they may see some price depreciation in the future, or they may not, but to call today's housing market a finacial bubble is historically inaccurate.



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