August 20, 2005



Take a look at this chart and tell me there's no housing bubble, and that real estate can keep on rising indefinitely. What the chart reveals is that over-investment in housing (as measured by investment per worker) is inevitably followed by a recession.
The two exceptions which prove the rule were the Korean War and the Vietnam War, which goosed the GDP by 15% and 10% respectively, pulling the economy out of the recession which would have otherwise taken the economy by the throat.

The glaringly obvious point is that the present level of over-investment is unprecedented, suggesting that the ensuing recession will be deeper and longer than previous over-investment/recession cycles. It's worth noting that the last "real" recession--that is, one that lasted more than a few months--occurred 25 years ago. That's an awfully long run of expansion.

 

 

 

 

 

 

  The chart's upward trajectory since 1990 has a eerie, if not downright frightening, resemblance to the parabolic rise of the NASDAQ stock market 1997-2000. As we all know, the NASDAQ subsequently plummeted 80%. That couldn't happen to real estate, the yammering industry bulls yelp; maybe so, but what about a 40% drop? Check back in 2010 and let's see where valuations are then.


* * *

copyright © 2005 Charles Hugh Smith. All rights reserved in all media.

I would be honored if you linked this wEssay to your site, or printed a copy for your own use.

* * *