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Nov. 10, 2006 - Popping the Bubble

Remember six short years back to the year 2000 and the discussion of the Y2K bug? Civilization as we know it was destined to end when the clock struck midnight, all because nothing in this big, wide world was built to handle a two-digit year beginning with a zero. There was one radio host who had devoted his show for months to this idea. And then he and the rest of us woke up on January 1, 2000 and discovered nothing had happened after all.

Fast forward six-plus years and you're seeing a similar phenomenon with discussion of the so-called real estate bubble. The concept is not original - preying upon the hidden fears of the naive has been taking place for thousands of year - and neither is the terminology, which was stolen from the "tech bubble" the stock market experienced shortly after the Y2K worries disappeared.

The short version of the story - investors who had abandoned the stock market entered the real estate market, drove prices to insane heights and now are pulling back out of those markets and leaving the local real estate markets in smoldering ruins. So all a prospective buyer needs to do is wait long enough, the 30 - 50% increases in property value will vanish and everyone can go back to buying at 2004 prices.

And don't forget to hold on to that Confederate money, Scarlett, because the South will rise again ...

The bubble is a myth. It is a myth fueled by people either with only the slightest understanding of the underpinnings of the real estate market, those who for whatever reason wanted to buy before the run-up and didn't, and kept alive by a national media reporting facts and figures without the slightest desire (or ability) to provide perspective to the statistics.

Some have discussed the progenitors of the real estate bubble has civic-minded citizens looking out for their fellow man. While noble, this broad brush ignores the truth behind the so-called bubble ...

Bubble myths are fueled by individuals' private agendas. Much like the woebegone criminals that appeared on the Electric Company in our youth (the guy smashing tomato sauce cans because his frog was canned as a child was my favorite), many who espouse the existence of a real-estate bubble harbor agendas that are relevant primarily to themselves but pass them off as a public good.

Maybe they bought in the midst of the hysteria. Maybe they wanted to buy but lost in a bidding war on a property. Or maybe they couldn't gather the courage to actually purchase, believing as always the market would come down even before it ran up, and now not even a drop in prices will allow them to enter the market. Or perhaps these folks are looking for the 15 minutes of Warholian fame to which everyone believes they are entitled. Blogging, like calling into talk radio, turns anyone with a keyboard (or phone) into an authority on the subject.

Bubble myths are fueled by are fueled by false hope. Many choose to believe the bubble hype rather than face the reality of markets where prices, even if they have declined, are not declining at a rate anywhere close to the increase. Yet some will read the blogs and listen to the news and fully believe that if only they wait a little longer, the home they want will fall 30% in value within months and land in their lap.

Of course, the major problem with such a notion and with the entire bubble concept is real estate is not the stock market. Stocks can and do drop to zero. Entire investments - every last cent - can be lost (and more, for those engaging in truly speculative plays.) Not so real estate. There is intrinsic value in land. Always has been. Always will be. To deny that fact is to base theory purely on mythology. Land may not always appreciate. Land may not always be located in areas where people want to purchase it (ask my sister in Houston, for example.) But land will always have an intrinsic value.

Bubble myths are fueled by a media machine with little idea what they report. As I've said many times, having been a reporter for a living, the vast majority of reporters are knowledgeable in many areas and expert in none. The job doesn't require expertise and, frankly, when you are on a tight deadline it's not necessary to know every nuance of the topics you are covering. You need to know enough to write a story that presumable will inform the public. You need to know enough to make sure what you're reporting is truthful. And that will suffice.

But as Jeff Brown has pointed out in the past, truth doesn't necessarily make a story accurate.

So where do we go from here? Sadly, nowhere. Another aspect of much of the bubble set is their demand for total capitulation on the part of those in the real estate profession and those who do not share their views. There is no opportunity for debate because it is not debate they seek. And if you try to discuss the topic rationally, you quickly become the victim of ad hominem attacks.

Instead, the decision is left for the public at large, particularly those who are thinking of buying a home. What the bubble folks aren't telling you is many of them already own real estate. Yet they argue that those who don't, those who want to purchase their first home, should not.

A little odd, don't you think?

(c) Jonathan Dalton, 2006 / Jonathan Dalton's Arizona Homes

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