Has the Housing Bubble Burst?

All I’ve heard recently in the financial media is that the housing bubble has finally burst. It’s really quite comical. First of all, there was never a housing bubble. Everyone just threw around the bubble term because we had experienced one in Internet stocks a few years back and it was easy to categorize a very strong housing market as a bubble.

It’s true that the housing market of the last five or six years was one of the strongest we have had in this country. The same can be said of the broad stock market from 1982 to 2000. We had the biggest equity bull market ever. However, it was not a bubble for all stocks, only one sector of the economy. Technology and telecom names fell by 90, 95, even 100 percent.

Outside of tech though, there was no bubble in stocks. The S&P 500 fell 50% when the “bubble burst” but the Nasdaq fell 80% and tech made up 30% of the index. As a result, half the S&P 500 loss was from tech stocks. Without the bubble, the market would have been down 25%. That classifies as a bear market, not a bubble.

Markets don’t experience bubbles every five or ten years. It’s a much rarer phenomenon than that. People are also calling the bull market in commodities as a bubble. It’s not. It’s a bull market. Markets are cyclical and when they rise they do so very quickly, but bull markets and bubbles are not synonymous terms.

So, yes, the housing market is very weak, but let’s stop saying how the bubble is bursting. The mean home price in the U.S. remaining flat or only rising 1 or 2 percent does not classify as a bubble bursting. Not even a 20% drop in housing prices on the coasts qualifies. That’s just a bear market, which is what typically follows a bull market. When housing prices in certain markets fall by 90% or more, then we can start calling it a bubble. Not going to happen.


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5 Thoughts on “Has the Housing Bubble Burst?

  1. Andy Kern on September 27, 2006 at 3:51 PM said:

    Excellent points. I also think it is important to note the difference between stocks and housing. A “bubble” is far more likely to form in stocks, which are easily traded and frequently speculated upon, than in housing, which is fixed, illiquid and not typically something someone is willing would buy or sell on a whim. In order for this housing “bubble” to “burst” the way tech stocks did, thousands of families would need to simultaneously decide to sell their home and start renting. Of course, sometimes homes are bought for speculative purposes, but this is generally confined to certain geographical areas like California and Florida.

  2. Anonymous on September 28, 2006 at 6:58 AM said:

    Valid point. Though there truly is a housing bubble that is waiting to burst in some emerging market countries. And it would burst if their economies don’t grow as well as they are expected and the interest rates don’t taper off at existing levels.

  3. Perhaps the definition of a bubble needs to be revised so that it does not account for the total gain or loss, but rather the public’s perception of it, as in news exposure, etc. If everyone truly thinks that the bubble is a bubble, it will be called that way in the national records, in textbooks, in …

  4. Anonymous on October 6, 2006 at 4:04 PM said:

    Frankly, I think you’re getting hung up on semantics.

    Was housing in a tulip-mania type bubble, no. NASDAQ 2000 type bubble, no.

    But housing was (and still is) pretty clearly over-valued by traditional measures. A small decline (such as we’ve seen to date) is only the start in my opinion.

    I believe that by the time it’s all over, this will be the largest housing decline in better than half a century. And to me, a twice a century event can classify as a “bubble”. No matter the semantics.

    Jay Walker
    The Confused Capitalist

  5. Chad Brand on October 6, 2006 at 5:03 PM said:

    Many do seem to think this is merely an issue of semantics, but I’m not so sure I’m on board for that. The term “bubble” refers to a balloon that is overstretched and bursts, leaving practically nothing left. A tech stock that goes from $200 to $2 certainly classifies. A 10 or 20 percent drops does not, in my opinion, regardless of how rare of an event a drop of that magnitude is. Yes, it is true that the current housing decline ranks only second to the depresion in the 1930’s. However, since national housing prices haven’t dropped since then, a 5% or 10% drop nationwide would be a once-in-a-lifetime event, but to equate a rare event with a “bubble” seems to ignore the why the term originated with respect to commodities.

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