Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Not according to Shiller. He often speaks of a housing bubble. You better get that van ready.
Housing prices can go into a bubble. But usually it is going to be a stock bubble that is the driver of the housing bubble. There is no ban on honest posting re housing prices that I am aware of. So you have to ask yourself, what would cause a housing bubble? Why wouldn’t the tension between buyers and sellers just produce the proper price (which is the entire point of a market)?
So long as honest discussion of the stock market is prohibited, a stock bubble will be created that will bring into existence trillions of dollars of Pretend Money. People think of the Pretend Money as real. That’s why the exuberance is irrational. Don’t you think that that is going to affect their thinking process re housing? If a person has enough money to afford a $300,000 house counting his stock holdings, he may feel fine offering to pay $250,000 for a house that he likes. He can afford it! But if half of the $300,000 is Pretend Money manufactured through a belief in Buy-and-Hold, he really cannot afford that house at all and will not offer to buy it.
Bubbles cannot be contained in a single market. Once Pretend Money is created, the bubble in the market in which it is created spreads to other markets. In time, it destroys our entire economic system. We all need to know how much money we have. And that becomes impossible once Buy-and-Hold stock buying strategies become popular and honest posting re the peer-reviewed research is prohibited.
We should be practicing price discipline in ALL markets. I do not know of any market in which the exercise of price discipline is discouraged except for the stock market. So the stock market is the driver of bubbles. We have to gain the ability to talk honestly about how stock investing works if we want all of our markets and indeed our economic system as a whole to work effectively.
My best and warmest wishes to you.
Rob
“Housing prices can go into a bubble. But usually it is going to be a stock bubble that is the driver of the housing bubble.”
Wrong again. Take a look at the percentage of homes now bought with cash. If home buyers thought that buy and hold was the dominate factor, they would not be buying with cash. The most recent run up in housing was that people decided that they no longer wished to live in large/crowded cities or in multi-family housing. Some also needed more space in order to accommodate family members moving back home. It had nothing to do with the stock market.
Housing prices have behaved like the stock market in the sense that they have gone up and down, but have continued to rise in the long term.
I don’t see what people paying in cash has to do with anything. You say that “if home buyers thought that Buy-and-Hold was the dominant factor, they would not be buying with cash.” If people thought that Buy-and-Hold was messed up, the CAPE value wouldn’t be where it is today, and we wouldn’t have a problem. If people think that their wealth is greater than it is, they are going to buy more things. houses included.
Housing prices can go into a bubble too. I am not saying different. After we have opened every site to honest posting and people have become educated about the realities of stock investing, it would be a good idea to try to educate people about the realities of housing bubbles too. But the stock issue is a bigger problem. More people look to the size of their stock portfolio to assess where they stand financially. And there is much more academic literature about the stock market. So that’s the area where we need to get errors corrected first. Other good stuff will certainly follow. And that’s of course a wonderful thing.
Rob
Since we are in a housing bubble, why don’t you sell your house? The price might crash on your house.
Selling an entire house is a more extreme step than reducing one’s stock allocation a bit. I have always advised AGAINST extreme actions. What I have said is that investors should seek to maintain the same risk profile at all times, which REQUIRES market timing.
The Buy-and-Holders take the most extreme position imaginable — that discussions of the last 40 years of peer-reviewed research must be prohibited. If you permitted honest posting, you would eventually be won over, Anonymous. We probably would not agree on every single point. It wouldn’t be reasonable to expect that. But it is my belief that we would find ourselves much more in agreement than in disagreement.
Shiller did not hurt us when he discovered that a pure Get Rich Quick/Buy-and-Hold strategy can never work for even a single long-term investor. He helped us. There was a time when the Buy-and-Holders were in favor of the idea of using peer-reviewed research as a guide. I think they were right the first time. We learn new things over time. That’s a plus. I believe that learning should be permitted in the investment advice field to the same extent that it is permitted in ever other field. I see it as a win/win/win/win/win.
My best wishes to you.
Rob
Since your house is the largest asset in your portfolio, aren’t you taking a big risk? Shouldn’t you be timing the housing market?
I think that what I should be doing is speaking out in favor of opening every site on the internet to honest posting re the last 40 years of peer-reviewed research in this field. That would stabilize our economy and permit us all to retire earlier while taking on less risk. What’s the downside?
Get Rich Quick/Buy-and-Hold strategies always have the emotional edge. Permitting honest posting re the peer-reviewed research gives reason-based strategies a fighting chance. I see this as a win/win/win/win/win, with no possible downside.
I naturally wish you all the best that this life has to offer a person, regardless of what investment strategies you elect to follow, Anonymous.
Rob