No. of Recommendations: 2
Hey Ricksdoomsayer,

Mr. Mann has fallen into the bubble trap.

Much as I'd love for Bill to take the heat, it's Mr. Lund who has "fallen into the bubble trap."

I agree with much of what you say. What I was trying to do in my article, however, was to offer plausible responses to the situation, rather than simply issuing apocalyptic predictions. It is not a real option for most to dump their real estate and flee to some other area or asset class that is a better value. For them, the house is a dwelling, not an investment. Most people need to hunker down for and protect themselves for the coming down cycle, which my graphs indicate is definitely on the horizon.

Only recently, quite coincidentally, in the last ten years of this bull market and Americas' obcession with creating wealth, have poeple begun to look at their home as a speculative investment. Something to borrow against in order to create more wealth or to look wealthy. The problem with this strategy is that it is based on the belief that real estate will continue to rise....

To point out wages and inflation only masks the problem and worse yet justifies the bubble in the first place. That is why Mr. Mann does not see a bubble and probably never will until it bursts.


I don't think you understood my point. I was not saying that wages or inflation mask anything. About wages, I was saying that they have a relation to the direction of the housing market. When they begin to fall, as they will, we will see housing fall, as it always does.

About inflation, I was saying that it may alter how we perceive the real growth in housing prices. I stripped it out in my graph, presenting real returns. Without inflation, we can see that indeed we are in a period of unusually robust housing value gains, which have historically been followed by periods -- locally even long periods -- of losses in real value.

Everyone told me that I was crazy, that real estate always goes up in Hawaii. We were part of the Japanese real estate bubble and no one saw it. Real Estate values topped out at roughly 350,000 and since 1994, have fallen to 280,000. That is a period of nearly 8 years of falling prices and in some instances are still falling.

Indeed. I pointed to Texas and Oklahoma in my article, which endured even longer periods of housing devaluation. It was for that reason that I warned people to be very careful buying into an area that had recently undergone strong growth.

Furthermore, those people that held on for the long haul regret it, because they could of sold and taken a small loss and put their money in the stock market. Instead many are stuck with negative equity.

Ah yes. They should have bought Hawaiian real estate in 1980, flipped it into stocks in 1993, then sold off in 2000. It's obvious now.

For most people, this is not a realistic scenario. For the vast majority, houses are dwelling. You can't trade homes like stocks.

Fear is a great motivator, unfortunately most people will listen to Mr. Mann and have a wait and see attitude. Both those in the stock market and those with little equity in their homes will be kicking themselves a couple of years from now when the Dow is at 6000 or lower and the housing bubble due to deflation bursts.

Little equity is a problem. Overleveraging, especially against hypothetically increased values, is the real danger to people. This was another major element of my article.

To say that the housing market is the same as usual is totally false.

You say this, then you give an example of Hawaii's boom and bust in the past. I gave the example of Texas and Oklahoma. It has happened again and again. This is the normal cycle of housing, varying as it does sharply from locality to locality. Some will boom and bust, others will ebb and flow. The strategy has not changed. This is not a market to be played for most people. Most people should buy and sell based on living requirements, build equity, maintain the house, and plan to live there for a long time.

That, I hoped, was the main takeaway from my article.

Fool on!
BrianZ
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.