Read an interesting interview with Robert Shiller (Irrational Exuberance guy) who is now predicting some sort of bottoming out in the US real estate market. Interestingly, he added a section to his book last year saying the property market there was likely to head south.
The US real estate market to quote an investment banking friend of mine, is detonating all over the place. Actually he told me this four days ago. And a few nights ago, the Dow Jones tanked followed dutifully by Japan, Asia and of course good ol India.
Shiller says he has been reading up articles and stories on what triggered the previous fall in the US. Interestingly, I embarked on a similar academic exercise, trying to understand what brought the real estate market to its bottom after 1994. I am not quite there as yet, but Shiller says one signal is when people start talking about how they were `had’ in a certain transaction.
Stories of stupidity
This is what he said in a Business Week article last week. "I've been reading old newspapers and advertisements to see how past booms ended. It's usually when stories start to circulate that embarrass people who believed in the boom. For example, there was a Florida land boom [in the 1920s]. There were stories of people buying land that was swamp. Booms end when prices start to fall, and then there are stories of buyer stupidity that are told and retold. I sense that's happening now."
Interesting, isn't it ? I met someone from a large conglomerate (with a substantial presence in real estate) on a flight into Delhi last evening. According to him, the functionary in his organization who drives the real estate business has predicted that 2008 is the year when the Indian property markets will turn. The same gentleman predicted the 2003 stock market bull run several months before it actually happened. I know because he told me !
So I am somewhat inclined to believe this statement. Of course one cannot guarantee this things. My American investment banker friend was telling me that the loan market was witness to the most amazing recklessness in lending last year. You went to a bank and applied for a loan. "What do you make?" the bank would ask. "Oh, $50,000, you would say." "Okay, here's your loan, enjoy !" Almost like that.
Bubble Or Not ?
The same gentleman I met on the Delhi flight said he was hearing of downward pressure on prices in areas like Gurgaon (outside Delhi) particularly when the sale was initiated by a seller, as opposed to the buyer landing up. This might be happening in other places too.
So will it all pop ? I have no clue except to say that if its happened before, it can happen again. Unlike many of my friends who think the only way is north, because India is growing furiously and all of that. I don't necessarily see a correlation but this is one of those things where its easy to take a position but difficult to go with anything but gut whilst defending the same position !
Shiller's insights are useful though. "Bubbles don't pop suddenly. The air comes out gradually. More and more people decide that the market is turning."