Real Estate Bubble Debate

RichDad: Coming bust good for pros, bad for amateurs?

If you attend one of the many RichDad real estate investment groups in New England or around the country, read this quote from one of the leading real estate bubble blogs before making your next real estate move:

Here in Los Angeles there is a huge Real Estate seminar coming up with Trump, etc. On the local news radio channel, ..."Rich Dad" author Robert Kiyosaki plugs his appearance at the seminar by telling the audience that "A real estate bust is good for the professional investor and bad for the amateur." Upon hearing this ad I was amazed at the sea that they would have to undergo to change their advertising. They have seemingly gone from "making money in real estate is easy" to "there's going to be a bust and I will scare you into attending."

Interesting. Verrrrry interesting.

My impression of RichDad's CashFlow game is that the repeated examples of investors making easy money in real estate was misleading and setting "amateurs" up for disappointment.  Can't remember a single scenario where any playing card lost money in real estate.  Guess you have to attend one of the seminars to learn how to protect yourself from that, or participate in their real estate investor groups or their new REI bird-dog forum. 

Alternatively, if you are an ordinary home buyer or seller, you can attend one of The Real Estate Cafe's upcoming "Bubble Hours" to exchange perspectives on the real estate bubble with your peers and learn some defensive homebuying techniques. 

The first "Bubble Hour" is tentatively scheduled for 6:30pm, Thursday, May 5th at the DoubleTree Guest Suites, 550 Winter Street (click for directions), in Waltham just off Route 128.  Please contact us by 11am on Monday, April 25th if you are interested in attending so we have enough time prepare a worthwhile evening.  To do that, can you post questions you'd like addressed in the comments field below?  If anyone knows the answer, fire away now.  No need to wait for May 5th to get some peer-to-peer feedback going.

Recovery time in past real estate bubbles

"The National Association of Realtors found 23 percent of homes sold in 2004 were bought by investors. ...David Berson, the chief economist for mortgage finance group Fannie Mae, notes that the level of investor ownership of housing hasn't been this high since the late 1980s, which led to a crash in housing prices."

Like millions of home buyers and sellers, a recent article in Yahoo asks, "Is real estate another bubble ready to burst?"  Noting that experts are cautiously watching the market and remain divided on the likelihood of a crash, the article highlights the role of housing speculators in current and past run ups in real estate prices, and one economist concludes:  "the risk of regional home price declines is higher as so many purchases are by speculators rather than residents."

At least one blogger agrees, writing:

And I don't know how many times I've heard that "prices may stagnate, but you won't lose money." In 1988, a man drove up to my parents' house in Queens, and offered my father 500K, cash, for the house. Four years later, it would have been difficult to get $325K ...for that house, and it wasn't worth 500K again until 2001.

Think he is exaggerating?  Last Fall, an article in the Economist Magazine predicted that the it could take parts of the US as much as eight years to recover from the current imbalance in the overheated housing market.  As hard as it may be to believe, that was the experience of some buyers in Somerville neighborhoods in the late real estate cycle in the Boston market.

If you are looking for a house now, how many years are you planning to live in the home or condominium you hope to purchase, and what are you doing to protect yourself from a gradual or sharp drop in housing values?

Why do fools continue to rush in where angels fear to tread?

A Chicago Tribune article yesterday entitled "Pop goes the Market?" made these controversial statements:

"Jeremy J. Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, writes that a bubble is created when the rising price of an asset is not related to its true value but is fed by "momentum investors," who buy only with the idea of selling to other investors at a higher price.

"Hal Young, a certified public accountant and a partner with Frank & Co. in McLean, Va., sees big problems on the horizon for individual real estate investors."

"The run-up in housing prices is a prime example of the greater fool theory, Young said: Even if you paid too much you'll make money on any investment if you find a buyer who's a greater fool than you are."

This is not the first time an financial pundit has used the "F" word to describe the irrational exuberance in real estate.  On March 15, 2003 -- more than two years ago -- CNBC's Jim Cramer told a packed audience at The Boston Globe's Money Matters Financial Expo that the "easy money buying and flipping properties is gone.  We're now in a 'greater fool's' market."

If, as the Chicago Tribune article says, "it's a fool's game to try to guess when the bubble will burst" what's your perspective on what a home buyer or seller should do this Spring?  (Special thanks to friend and former client, AlextheJester, for use of the image on this post.  To see why he's a fool even an economist could love, enjoy take five minutes to enjoy his online video clip, "What's this fool going to do next.")

Are lizard brains driving "irrational exuberance" in real estate?

The brain is hardwired to expect patterns to repeat themselves, says Harvard Business School professor Terry Burnham author of Mean Markets & Lizard Brains:  How to Profit from the New Science of Irrationality, which may explain why many smart people to want to buy homes at irrationally high prices.  Publisher John Wiley & Sons writes: 

"In contrast to old-school assumptions of cool-headed rationality, the new behavioral school embraces hot-blooded human irrationality as a core feature of both individuals and financial markets. The 2002 Nobel Prize in Economics was awarded to scholars of this new scientific approach to irrationality. ...The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc with our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this novel approach to all of today's most important financial topics: the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes happen, and why people are built to want to buy at irrationally high prices..."

How should smart home buyers protect themselves?  Make every single financial decision rationally, not emotionally, says Burnham.  Analyze your own behavior, find out where your emotional weaknesses are, and act in rational ways to counteract them.  Most economists believe that people are rational but over the past 20 years they have found that is not the case.  People make all kinds of mistakes, driven by emotional non-rational factors whether they are evaluating stocks, bonds, or housing.

When asked by The Motley Fool if he would buy, sell or hold real estate right now, Burnham said, "Real estate is not a bubble, but it is overpriced.  ...the reason it has gotten there is that people have been fooled by low interest rates."  Burnham's bottom line advice in the radio interview today:  "Don't buy, I say "hold" as I do in the book."  Chapter Nine, entitled "Live in Your Home; Make Your Money at Work" includes a seven page subchapter on the housing bubble.  You can view the table of contents, index, and reader reviews on Amazon.com.  I haven't read the book or the section on the housing bubble yet but am eager to do so. 

What's your take -- is the irrational exuberance in the housing market being driven by our lizard brains or something else? 

Will mobloggers pop the real estate bubble?

Yesterday's conference on Grassroots use of Technology at MIT has reenergized my interest in moblogging in real estate.  Will the prevalence of iPods, smartphones, and digital video recorders create a new generation of house hunters turned citizen journalists?  Not if the decade-long, lemming-like rush continues to cause home buyers to view each other as competitors, is my guess.

But if the housing market begins to slide as real estate bubble watchers caution, buyers may look to each other for information about what is really happening in the marketplace rather than traditional real esate agents / listing agents who are obligated to get the highest price for sellers and continue to fan the flames of "irrational exuberance."

How will those peer-to-peer exchanges occur?  Will those amatuer roving real estate reporters begin to post their own comments in writing, audio clips, or video clips to the web?  Those are the kinds of questions I would like to explore in this discussion of "Moblogging in Real Estate."

In addition, I'd like to use the forum to experiment with my own attempts to learn each of the means of communicating above.  I am particularly interested in experimenting with Podcasts and Videoblogging, and seeing how VR images can be incorporated into blog posts to give real estate consumers richer information than otherwise possible from look-alike listing sites published by over a million real estate agents nationwide.

Here's one attempt at posting a VR movie in Quicktime.  Does it load on your site and are you able to rotate the VR image with left or right with your mouse?  Need to learn how to make my videos load online... anyone else in the real estate community -- or any home buyers or sellers -- experimenting with moblogging?

Download top2_030205.mov (296.4K)