You only have to get in a cab to realize that the real estate boom has become a bubble. Cab drivers will point out how much houses have gone up. While once they gave tips on tech stocks, now they tell you which neighborhoods are likely to experience the greatest price inflation. Listen carefully, and you are likely to overhear them on their cell phones — talking to real estate agents about their new condos.
House prices have risen 40% in the last four years. This increased household net worth by about $6 trillion. In many areas, the price increases are accelerating. Nationwide, house prices rose 12.5% in 2004 — adding approximately another $2 trillion to homeowners’ net worth.
But there are signs that the trend is nearing an end. The buyers have added so many feathers…and so much new “wood” to their antlers…they can barely move. Rental vacancies have reached 10% — a record high. This has cut rental income to the point where the P/E of houses — average selling price/12 mo. rental income — has risen to 34, which is higher than the P/E of stocks at the bubble peak in 2000. Another way to look at it is that rental income averaged about 5% of house prices in the 1990s. Now, they have dropped to 3.5%.
Pity the poor renter. He might just as well drive an old economy car and buy his clothes at the Goodwill. He is the sort of man you wouldn’t want your daughter to date, let alone to marry. He is the poor loser who forgot to buy tech stocks in the late ’90s…and now he is missing the real estate bubble too. He is the quiet, lonely dork who never gets invited to parties…and has nothing to say…except an, “I told you so” he has been holding onto for years…waiting for the right moment.
But, his time will come.
“You’d better talk to Jules,” said a voice on the telephone yesterday. “He just got rejected by one of the colleges he applied to; he feels pretty bad.”
“But he didn’t want to go to that college anyway,” we replied.
“Yes, but it still feels like a setback to him. He feels like a failure.”
“Jules, I understand you didn’t get in…”
“But you didn’t want to go there anyhow…”
“I know…but I wanted to know that I could get in…I wanted to be accepted…”
“But you’ve already been accepted at two other places…”
“Yeah, but they’re not as prestigious…”
“Well…I don’t know… but I’m sure they’re just as good…probably better…”
“Maybe, but it still would have been nice to be accepted at a really top school…”
“Don’t worry about it, Jules. They get thousands of applicants. They can’t tell which of them will be good students. So, it’s probably rather arbitrary and random. Don’t take it personally. Remember…you can’t worry about the outcome. You can’t control the outcome. All you can do is to do your best. If you do that, you’ve got no reason to worry or feel bad. Besides, worse schools than that have rejected me…
“And you can always come to work in the family business…”
“That’s what I’m worried about…”
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.