Monday, March 28, 2005

House For Sale

Suddenly there's a flurry of articles on the housing boom. Friday in the NY Times, Saturday in the Washington Post and today in the Financial Times. All with stories of how people are trading houses like they used to trade dotcom stocks in the late 1990s. (See: Extraordinary Popular Delusions And The Madness Of Crowds. By Charles MacKay. 1841. You can get a copy here:

http://www.popula.com/items_fp/item_description.cfm?item_fp_ID=237616 )

There's a theory that goes something like this: LT Capital Management collapsed back around 1998. With that and the related Asian currency crisis, the Fed had to pump a lot of money into the system. The liquidity eventually found its way into dotcom stocks. When that bubble collapsed in 1999, the Fed had to do a whole lot more injecting of money to try and minimize the negative effects on the economy. That easy money policy has been in place pretty much ever since, and its effect has been to support the bond markets, the stock market and, as a kind of side effect, the house market. It's called Pass The Bubble. Where to next?

The thing about "market prices" is that they aren't necessarily representative of the whole market. Prices are made "on the margin" -- there's a whole lot of houses out there, but people determine the value of their houses by referring to a very small number of transactions. It's a very illiquid market, and you really can't value the whole housing stock based on a few trades. (I was reading somewhere the other day about the Japanese property market bubble in the 1990s, when, it was said, the land on the which the Imperial Palace and gardens sit in Tokyo was worth more than the entire state of California. That sort of makes the point. Apparently average prices in Japan have now fallen by about 80%).

Well, prices are certainly getting pretty crazy in my neighborhood. Supposedly my house is now worth over three times what I paid for it about five years ago. So, despite the fact that it would be a royal p.i.t.a. to find somewhere else to live and move all our crap over there, I called in the broker and signed up. If you are one of those speculators who is making such a finel living flipping houses, feel free to drop me a line.

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