bostonbubble.com

[john p]

http://www.forbes.com/personalfinance/strategies/2006/03/08/stack-housing-bubble-cz_js_0309soapbox_inl.html

Check out the Housing Market Bubble Comparison (graphs) comparing the graphical trend lines of the current housing bubble, the internet stock bubble of 1995-2002 and the oil exploration/services composite of 1976-1982.

I got my MBA and can recognize when values aren't based on fundamentals. This knowledge seems like a curse when you’re in a frenzy of a sellers market. I just think about all this money I spent to give me a perspective that this not being a good time to buy. I'm thankful now that I stayed grounded and was patient. Maybe later I'll understand the anatomy of a bubble and will learn how to make a buck out of the next one.

When asset values break through their underlying fundamental value it's like a space ship breaking through the stratosphere and isn't as pulled from the gravitational forces from below. It's like fundamentals, like gravity don't apply? So the professors that teach fundamentals get ignored and they march in another set of instructors that talk about convexities and technical trend analysis. The aforementioned comparison shows that the space ship is coming back to the earth's atmosphere and might start to feel a little bit of fundamental, old school, tough love, common sense gravity.

I'm starting to think that I owe a debt of gratitude to that old finance professor.

The fallout of this bubble isn't going to be like the stock market or oil composite. When that finance professor talked about the difference of alternatives for a company to either issue stock or borrow capital, he warned that you could always stop paying dividends or the stock could get devalued, but if you chose the bank, it could close your doors if you stopped paying. This housing bubble has created a very big hungry gorilla that is going to need to be fed, meaning that everyone is going to need higher salaries to pay for the higher cost of housing. Greenspan used to almost sit back smile and marvel at how our economy seemed to be able to be resilient and be creative and avoid major economic downturns. I wish I had a better insight to what could be in store here to help deaden the impact of this crash.

[admin]

john p,

Thanks for another interesting post.

Forbes' Housing Bubble Bellwether Index seems like a pretty clever way to get a leading indicator on where real estate in general is headed. I would expect it to be ahead of homebuyer expectations by at least several months since I don't think most people concern themselves with macroeconomic data and will be more influenced by anecdotal stories of friends and news reports. My expectation is that those anecdotes will take time to pile up and sink in enough to change the herd psychology. However, the stock of companies that are a bellwether for the bubble are quite a bit more liquid and shouldn't suffer the same lag time (although stocks are obviously susceptible to irrational exuberance as well).

Any idea of what the makeup of the index is? I would be interested in the weighting of the 12 companies and especially in what the composite P/E ratio is. Just as an example, Toll Brothers is currently at a P/E of 6.04. Ouch! This is in comparison to a P/E of 15.62 for the S&P 500 Index (I'm actually using the P/E for SPY, which tracks the S&P 500 since I didn't see a P/E for the index itself). The market is apparently not optimistic about Toll Brothers' prospects.

- admin

PS - If you're up for it, I encourage you to register for an account so that others can't impersonate you in the future, now that you've contributed many interesting posts.

[john p]

I also have a background in architecture and planning so I look at things from an abstract perspective. Like architecture there is a mixture of art, sociology, and science in play here.

The art aspect is the quality of life issues, the qualitiative benefits that demand a premium. A previous poster talked about the North End for food. This was such a well placed comment because it kind of describes Massachusetts. In an abstract way that comment embodies a justification for going to a place that is old, designed for a previous era, not up to code, tight, small, lacking parking and personal space. The food is so good and it has such a nice feel, people overlook some fundamental flaws. Like Soho or Greenwich Village, it could get so exclusive that it looses it's genuine appeal and it redefines itself. The North End is a wonderful place, but it is not the working class neighborhood that has the mother yelling "Anthony, Anthony" out the window. Those images are in the photos that adorn the walls of the restaurants.

The scientific aspects relate to the financial fundamentals of income/affordability, calculating the wear and tear and performance aspects of the built environment like how well some of these old homes hold the heat in etc. We're in the "Call Joe for oil" in the winter and brownouts in the summer era. The economics of this State almost indicate a "feast and famine" trend. We are really sensitive to macroeconomics i.e. national recessions. We feel the rises and falls deeper than the rest of the country. Our architects need to worry about the freeze/thaw cycles and have to be a little more on our toes than in other areas...

The sociological aspects seem to be a blend of the educated, cultured, historical and explorative nature of our State. The constitution of our State is of course manifested in our laws but is also displayed in our markets and behavior. The constitution I'm talking about is the inherent properties that is our makeup and backbone. Because we're forward thinking, cutting edge we need to deal with feeling the pains of being on the bleeding edge sometimes i.e. the internet boom/bust. What we're not seeing as of late is the traditional nature, the common sense that recognizes fundmentals that carry us through a variety of seasons and generations. In contrast, take California, think about the Gold Rush, people leaving home to become movie stars, chasing their dreams, think about their reaction to the oil crisis of the late 70's, think about who they elected govenor, think about the brain childs in Silicon Valley... See the young, risk taking forward thinking nature? It's not Peoria.

Now where I got my wires crossed is when I manifold these things. I see our constitution like properties of a material. Are we more ductile and flexible or are we more rigid and brittle? I mentally used to overlay the structural diagrams exhibiting the properties of a material showing the build up/growth of forces to their elastic limit and ultimate collapse. These diagrams reflected the inherent properties of the material.

http://www.shodor.org/~jingersoll/weave/tutorial/node10.html

notice that the ductile i.e. steel, can hold longer under a certain level of stress before ultimate failure. The brittle i.e. concrete doesn't give much of a warning. Is Massachusetts more brittle or ductile? Or are we a mixture like steel reinforced concrete?

compare to:

http://www.forbes.com/personalfinance/strategies/2006/03/08/stack-housing-bubble-cz_js_0309soapbox_inl.html

now look at the top chart on page 9:

http://www.marealtor.com/content/AssetMgmt/Documents/Member%20Resources/Research/AntiBubbleAnalysisBostonMSA.pdf

Now think about what the properties of our State's constitution is? Clearly we march to a deeper beat and it seems that we're on the leading end of the curve.


When you think about a bubble, you also need to think about the properties of what is bubbling and more importantly, what is surrounding the bubble? Realtors are trying to talk about this bubble like it is a "balloon" that will deflate and not pop. Greenspan talked about "froth" and "bubbling up" i.e. to the surface.

I think Greenspan has his finger on the pulse a little better. Think about his analogy. Froth, localized bubbles? Hmm. It makes me think about a pot of water or sauce. When the sauce (not gravy) used to bubble up and pop and hit my mother when she was stirring it (she'd say ouch), and my father used to say "God has strange ways" and then my mother would grab his chest hairs showing through his white v-neck t-shirt. All the kids would be cheering Mom on in the kitchen as they would lovingly scuffle. Mom would always win beating my father into submission with the wooden spoon. I digress.... Oh, yeah Greenspan; bubbles in his analogy are hot spots within the water that are the water's way of farting out the heat until it becomes evaporated. This hot pocket of air within the water is being drawn up almost like reverse gravity like a diver coming up to the surface for air. I see cities like Boston as exhaust ports for the overheating of the national real estate market. It is very, very hard to quantify and identify activity when the property of one material is beginning to change states i.e. from liquid water to water vapor. This is why it is important not to unthoughtfully interchange local and national statistics. I'm not enough of a math guy to explain this but I envision that the change in delta from the mean temperature and the exhaust port temperature will help indicate the pressure and direction of the temperature flow of the overall pot. Essentially, the exhaust ports are good leading indicators for the overall direction towards cooling or heating.

Now why don't we hear the teapot whistling? Who would be the teapot in this scenario? The national and state associations of realtors have a lot of the data and seem to think its ok to "spin" it. Would you honestly hire a realtor that told you that property in your area was overvalued by 30%? Hell no, you'd choose the guy that said that prices were going to keep on rising. Newspapers run a lot of advertisement for the real estate industry so they make lame attempts to do research or signal anything. Economists are amazingly skilled at hedging their comments so no matter what happens they're covered. So where is the circuit breaker to signal the overheated wire? Where is the fire alarm? The cities and towns like the cash flow from the higher assessments, the Fed's like the cash flow to increase purchases of their bonds to pay for the largest expansion of government spending and to pay for our war in Iraq. The banks will own a larger share of our lives so they're not complaining unless it becomes too risky for them (which will only depend on the mainstreams awareness that they are slowly being boiled). We will go from being free citizens to effectively indentured servants.

I think that Boston will be one of the first to signal because of the constitution and properties of our people. We threw the first punch against England to get this Nation started. We were the first to stand up against the child molestation crimes being committed within the Catholic Church (which I am a member). We are the tip of the spear in so much and our traditional values really weigh on us when things seem to have broken through the atmosphere and are flying in space. Another thing about Boston is our love for freedom. Being deeply in debt is really sacrificing a bit of freedom. Without that freedom it might be difficult to speak up at work when things get bad because you have a big mortgage to pay and mouths to feed. Without a little cushion we might not feel comfortable taking risks and starting new enterprises etc. We rely on that spirit and we can't become a beaten dog. Without that cushion our children will be increasingly raised by day care providers.

One caution to Greenspan's successor: Although our economy is flexible like steel and can bounce back and hang in there under stresses and strains, when steel overheats it melts and it looses all of its structural properties. I have seen pictures of melted steel beams folded over heavy timber wooden beams. You've heard about putting the frog in the hot water, how it jumps right out, but if you put it in warm water and turn it up ever so slightly it will feel nice and warm and comfortable until it gets cooked?

To our politicians, we have a lot of money floating around right now and it needs to know where to go? With the baby boomers growing their nest eggs bigger and bigger. It was like a parking lot around Christmas everyone needs to park their money somewhere. When the stock market tanked everyone thought real estate was the best investment because hey they're not making any more land.... So how about a novel idea and create a vision and get people behind that vision so that we invest in something positive for our future and maybe create investments that target pretty obvious upcoming issues. We use this surplus of capital and we direct it into investments that help us all. Why not build well planned nice elderly housing communities on the outskirts of suburban areas to alleviate some of the pressure on the housing demand? How about improving mass transit, repairing infrastructure, hybrid technology? This housing bubble is a manifestation of our society wasting energy and resources. We had so much momentum we cooked ourselves. All we needed was direction to use the energy in a positive way. They say fire can keep your house warm or burn your house down. We need leaders that can get all our cylinders firing like a racecar at Daytona and get the car to drive in the right direction.

Long blog, sorry. I did register for the site. If anyone did impersonate me I would have guessed it would have been my wife. I never put anything past that woman...

[john p]

Look at page 4.

http://www.engr.pitt.edu/Chemical/undergrad/lab_manuals/flotation.pdf