Why the real estate boom will not bust …
Before you declare me completely insane and out of touch with reality, the title of this post is actually not my claim, but that from Chief Economist David Lereah of the US National Association of Realtors (NAR) made back in 2006. I just thought it would be interesting to see how things have changed.
David Lereah wrote a pre-bust classic in 2005 titled “Are You Missing the Real Estate Boom — The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade – And How to Profit From Them.” Lereah, who was later dubbed by critics as the Baghdad Bob of real estate, updated the book and re-released it in February 2006 with the new title: “Why the Real Estate Boom Will Not Bust and How You Can Profit From it.”
The bust began a few months later and we all know how the house price bubble deflated and the effect it has had on the global economy.
So how come the housing crisis has come as such a surprise to so many people?
The largest part of it is what we can call bubble psychology. Economists often quote Stein’s Law: “If something cannot go on forever, it will stop.” And the easy credit that the housing bubble was built on, was one trend that could not go on forever. So it ended. With a bang.
But that doesn’t explain the surprise element. Consider this, once a bubble is well and truly underway people forget that prices go up and down, be it houses, stocks, gold or food prices. They all go up… and down. But, towards the top of the cycle, just about everybody forget the basics and cheerfully states that this time it will be different, that we are in a new era. But the internet bubble of the 90s wasn’t different and neither was the housing crisis. It all ended in tears.
There seem to be several dimensions to bubble denialism, there is the denial of the average person which is largely based on the concept that ‘my neighbor, or uncle made a killing in real estate therefore I will too…’ and in our eagerness to make a killing too, to get rich quickly, to measure up, we deny ourselves to see reality. We keep telling ourselves, this time is different.
And there is the political dimension. According to the WSJ, “former Fed Chairman Alan Greenspan frequently argued there could be no housing bubble.” Well, he and the White House wouldn’t have wanted the public to realize their recent increase in wealth was nothing more than a bubble waiting to burst, would they. That’s not good for elections. Cynical but true, no government will admit to a bubble unless it has burst. And even then they’ll try to cover up the mess.
Of course, there is the vested interest, the people making money out of people investing in real estate: real estate agents, finance brokers, mortgage companies, you name it. They all had too much skin in the game to admit the reality of a bubble. And then of course you have the media who swing from one end of the spectrum (“The Boom Will Not Bust”) to the other (“Housing Bubble Explodes”, “Next Great Depression”). In reality, there were plenty of voices out there claiming a bubble was waiting to burst, there was sufficient data to support those claims but bubble denialism made sure these voices were not heard until it was too late.
Now the interesting question is, does bubble denialism also apply to depressions? Are the US, the UK and other Western European states facing a depression but not willing to see it? If so, the pain caused by the housing crisis and ensuing global credit crisis is only the beginning of what is yet to come. Now there is something you don’t want to admit to…