Was Real Estate a Bubble?

Was real estate a bubble? What about gold and treasuries? The word “bubble” is hideously overused. Bubbles don’t come a long very often but after what happened with tech stocks ten years ago and what has been going on with real estate for the last three years many people are looking for the next bubble like it is going to happen any day now.

I am far less concerned about labels as I am about sidestepping some segment that might go down a lot. I have been saying for ages that treasuries are not a bubble but they are very expensive and that I have no plans to buy high and take the risk that goes with buying high on the fixed income portion of the portfolio. We target 2-3% in gold it has grown a little larger than that and if that goes down a lot the current weighting will simply create a drag (maybe) not a portfolio meltdown.

You make think bubble is the correct word for all of these things but either way I think there is utility in the chart above. It captures Yahoo (YHOO) down 83% from March 2000, Intel (INTC) down 69% since March 2000, Microsoft (MSFT) down 50%, Cisco (CSCO) down 66% since March 2000 and Juniper (JNPR) down 76% since March 2000. I have referred to bubbles in the past as all encompassing events for the magnitude of the decline and the extent to which people went to great lengths to take on too much risk to get a piece of the action. This applied to tech stocks IMO and real estate but not gold and treasuries. To be clear this is not to say treasuries and gold can go down a lot, just that declines here would not have the fallout like with tech stocks and real estate.

If real estate was a bubble then the chart above might give some indication of what to expect with housing. I tend to think that the vast majority of the decline is in for real estate prices but there is a reversion to the mean argument out there that calls for them going much lower. What I think is a more instructive lesson from the chart is the time needed before things start to turn up. There are tech stocks that are higher than where they were ten years ago but the names above are “important” stocks and there has been a whole lot of lingering with them and many others since their respective peaks.

Due to what looks like a bleak outlook for jobs, demand for home purchases could also be bleak for a long time not to mention what appears to be a lack of movement of money and even after ten years tech stocks don’t offer a lot of encouragement same with Japan after 20 years.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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