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Real Estate Bubble?



Editor's Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Dear Mr. Succo,

I graduated business school two years ago and wanted to go into Investment Management. However, my father owns a construction company in NYC and he was drowning in work and asked if I could help him out. I agreed. Recently, I went on a date with a girl and told her that when the real estate bubble pops I plan on pursuing a career in Investment Management. She said, "but Real Estate is so stable and it's always good." Instead of ruining the mood, I just smiled and agreed.

Minyan Tsachy


This is why bubbles persist and grow despite warnings from people who know better...human psychology. People in general deal with problems/stress most often by ignoring them, not rocking the boat, and being overly skewed to either greed or fear (e.g. people involved in real estate speculation are more fearful of missing something than they are of losing something). This all skews a human's (general) ability to assess risk properly. Studies have been done where people in general do very poorly in assessing risk: they over-estimate and under-estimate it.

Floyd Norris wrote a very good article in the NY Times business section this morning describing that conventional wisdom is often wrong; but wrong has more to do with timing. In his example, most very smart people know that the dollar is over-valued and will eventually decline (economic imbalances are very great and are growing), but the timing is the issue. I believe there is a housing bubble, but because of human psychology, it could grow even bigger for some time before it pops or deflates. But all the while the risk grows greater as prices signal the opposite.

"Markets may remain irrational longer than I can remain solvent," wrote Keynes. Warren Buffet once said that if markets were efficient, he would be on the street with a tin cup. Psychology is the variable that drives markets into inefficiency.

Minyanville (particularly me) has been accused of being overly bearish, but I cannot remember an instance where I have told someone to short here or buy here because I respect the fact that psychology is a main variable. Mostly what I try to do is provide an offset to the constant barrage of bullish insights coming from the great sales machine called Wall Street so that Minyans can gain a perspective. But, from there psychology drives the risk premium that the market (people) assign to assets. This is the main driver of relative prices.

I believe that Scott's work is the best model so far that I have seen that addresses this aspect.

Prof. Succo

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