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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: X Y Zebra who wrote (24738)	10/22/2004 11:13:35 PM
From: Mike Johnston	Read Replies (2) \| Respond to of 306849

(the fact that CPI understates inflation is not a question of if but how much) Ah! Do I hear evil government manipulation? -gg I admit that not all of those militia's statements are untrue... too bad that they are wackos of a different flavor... -g Retirees have been told that their cost of living has increased 2.7 % last year. Well, i guess members of a militia who live and hunt in the woods of Idaho would certainly agree with that. LOL Honestly, can you find just one person anywhere, whose cost of living has increased only by 2.7 %. I don't need Bill Gross to tell me what is going on at the supermarket. And what is it with all those companies missing earnings estimates because of higher costs. At least after paying all my monthly bills i can erase any memory of rising prices by buying a dvd recorder or digital camera for $100 cheaper than last year. Unfortunately those things will last me for a few years while the next set of bills will arrive in 30 days. cheers

To: X Y Zebra who wrote (24738)	10/23/2004 12:13:22 AM
From: Mike Johnston	Respond to of 306849

Is it a bubble? Personally, in certain areas and segments of the market = YES, but it is NOT an overall-world-wide bubble. Cannot argue with that. Not all of them... I do not deny as I stated above, there may be some areas and segments in which your assertion is true, but not everywhere. Real demand is there... Of course there is demand, if there was no demand there would be no bubble. Bubbles are driven by huge demand. The question is will there be the same level of demand six months or a year from now ? Is it rational demand or is it a buying panic ? Also what kind of demand is there ? Is it real or artificial (created as a function of the bubble itself). As i will explain below if prices just flatten for a few months, only real demand will stay, artificial demand will disappear overnight. Every individual real estate transaction is consumed because of buyer's demand, however one has to look at the nature of that demand to come to the conclusions about current real estate boom. There are basically two kinds of normal, real demand for housing: a) need based demand : family buying their first home or upgrading to a bigger one because of the need for more space or more comfort. b) investment demand However in current real estate market there is another kind of demand: buyers parlaying their gains from one property to buy multiple properties for investment purposes. This demand is truly artificial. If the individual did not realize gains on the first property then there would not be any equity to invest in other properties. It is like a trader who made significant profit on one stock and uses the additional buying power that is now available to him to invest in another stock. That is why stocks move in groups, first the strongest stocks and at the end of the cycle the weakest, the latter not on the basis of fundamental values but because there is additional capital that has been created and is available for speculation. As soon as prices flatten for a while, that demand will disappear for the simple reason that additional equity to put down on other properties is not being created. Another factor that has to be considered is urgency or fear. Many participants feel that if they do not act immediately they will either miss their last chance to afford a property or they will have to pay a higher price next month or next year. Just the sight of 12 bidders at an open house will multiply that fear. With that kind of emotional fear it is possible for the value of the transaction to significantly diverge from the rational value of the property. Then if prices flatten and emotional urgency to buy disappears the demand goes down and not only that but the buyer has the capacity to make a rational decision as opposed to emotional one. If a property is sold with a return on investment of 3 or 4% that is clearly not a rational but emotional decision. Thus it is theoretically possible to have sudden drops of tens or even hundreds of thousand of dollars to bring the price down from emotional to rational level. Of course the real estate bubble does not have to burst in nominal terms. What Greenspan is trying to accomplish is to print enough money so that bubble is deflated slowly in real terms. The average Joe is going to be less worried about a $3 gasoline because he "made" 300 K on his house and feels flush. However it would not feel that great to have some equity evaporate.