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It's Deja Vu All Over Again...

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It's not the Nasdaq, it's the House-daq!!

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CNBC was featuring a real estate investment club from Los Angeles a couple of minutes ago. Its members shared their investment strategies which made me feel that the stock hysteria of the late '90s is unfolding right in front of my eyes again.

The stories of receptionists quitting their jobs and becoming millionaire day traders are repeated among the same lines by these LA investment club members. Several comments caught my attention: "I am using negative amortization loans, and yes it adds $10 thousand to my loan, but the properties are appreciating $100-150 thousand." Another comment is simply a home run, "I quit my job that I had for thirty years and I am investing in real estate full-time. I am not just investing, I am investing smart."

There are several factors that make real estate and stock market bubbles different:

  • Arguably there is more leverage involved.
  • Empty or rented below mortgage payment houses (this is the case in most markets) have a negative cost of carry. Thus in absence of rising prices we are likely to see a flood of inventory on the market thereby pushing prices lower.
  • People live in the houses not in their stocks, so price dynamics are a bit slower in real estate.
  • Your house price is not quoted in newspaper every day, thus price volatility doesn't drive investors crazy.
  • Even if people believe that market is overvalued, most will still be buying a house as it is more convenient than renting (I did that). This leads to the following: first of all, it forces consumers to buy houses they cannot afford, increasing the utilization of higher negative amortization loans (I did not do that). Also, it creates some natural support for home prices.
  • Arguably a larger portion of the population is impacted by a deflation of the housing bubble than by a stock bubble.

There are probably some other points that I missed but I am hungry. Bon appetit.

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No positions in stocks mentioned.

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