"It's totally different in the real estate market than it is in the stock market."
~ Thomas Kuntz, CEO, Century 21, February 25, 2005
To the seasoned investor, four of the most dangerous words in the English language are "It's different this time." Five years ago, this country experienced the mania to end all manias for anything tech-related. Today it seems the public has merely shifted to all things credit-related.
Manias share four common characteristics:
- A feeding frenzy sends prices parabolic. In March, 2000 the Nasdaq Composite briefly touched 5000, up 44% per year over a five-year period. Homebuilding stocks today are up 46% annually in five years. The median price of a home is up 8.2% per year over the same period. Adjusted for 5-to-1 leverage on a typical mortgage, the humble abode has appreciated 41% annually.
- The public jumps in with both feet. During the late 1990s, stock ownership climbed to roughly 50% of households. Today "home ownership" has passed 70%, a record.
- Valuations detach from economic reality. In 2000 many tech stocks traded for over 50 times earnings. Today, in some of the hotter markets such as Southern California, home prices command as much as 50 times their rental incomes.
- Rationalizations abound for why valuations are reasonable and the trend will continue. Talk of a "New Economy" has been replaced by the politically-sanctioned euphemism "Ownership Society." Then, as now, favorable demographics and an accommodative Fed were expected to keep the party going.
Admittedly, there are differences. In 2000 Wall Street underwriters raised equity for marginal businesses; today they raise debt for marginal consumers. Five years ago the federal government enjoyed a surplus; today deficits run as far as the eye can see. In 2000, the dollar was strong, inflation dead, and commodities weak. In the five years since, the U.S. Dollar Index dropped 22%, money supply (M3) grew 44%, and the CRB Index gained 40%.
One question keeps nagging us. Manias are rare occurrences, gracing us with their presence every 30 or 40 years. How can a crowd delude itself twice in just five years? Perhaps at least part of the answer is that there are actually two crowds at work. The tech mania, it seems, was primarily driven by testosterone — Ferrari driving CEOs of dot-com and Silicon Valley startups, napkin-scribbling venture capitalists, master of the universe investment bankers, and hyperactive day traders. The present day mania appears to have more balance, with women playing a greater role. Men are more prone to think in terms of abstractions and do things like chase technology stocks into the stratosphere, while a house is tangible and appeals to both sexes.
Tech Mania, 2000 Credit Mania, 2005
The severe Nasdaq bear market of 20002002 took the male ego down a few notches. Wives who were suspicious of the boom, but reluctantly supported their husbands anyway, knew who to blame when the couple's finances unraveled. Many refused to adjust their lifestyles to the new reality. Enter Alan Greenspan offering a cheap and seamless way to keep up appearances, upgrade the kitchen, and buy that new home theater system: simply tap into ever-rising home equity. The wife was able to spruce up her nest, the husband salvaged his marriage, the finger pointing ended, the house climbed in value, and they all lived happily ever after.
Predictably, the residence has become an emotional hot button, making this credit mania all the more terrifying. Popular mortgage ads feature the woman in control as lenders line up to provide cheap credit on her terms. Attention personal bankruptcy specialists, divorce lawyers, and marriage counselors. Business is about to improve.
March 3, 2005