In a study of market bubbles, Charles Kindleberger and the International Monetary Fund found that every asset reverted to its mean. At the time, the people refused to believe it. Like you, they said it was different this time. Demand for tulips, railroad stocks, tech stocks, housing would be too high.
As you know, Rich’s charts so clearly show that the last two San Diego housing cycles reverted to a price/income ratio of 7. Unfortunately, we don’t have data for the cycles before the last two. In regard to the ratio of 7, edna_mode made an interesting post, speculating that we could rise to a new permanently higher plateau, to a higher ratio. I debunked that theory in my post Can this Bubble Correct at a new higher plateau? . That post definitively explains why every asset bubble in history that we have a record of, has reverted to its mean.
sduuude, you say that as prices drop, demand goes up. But this is clearly *not* happening. Prices are down 10% or more, but demand keeps falling.
Yesterday I copied iTulip’s Eric Jantzen, where he explained why demand actually falls as prices drop. Likewise, as prices rose, demand rose furiously. People want more of the bubble asset when the price rises, less when it falls. So you see, the lower the demand, the lower the prices, and the lower the prices, the lower the demand, and we get into this vicious feedback loop. At some point, in 5 – 7 years, prices will be so low, that bargain hunters will come in and start buying. The median will drop for another 2 years, but those of us in the know, will be out buying at that time, at the very bottom.
sduuude, I ask you to take the challenge Grantham gave to his 2400 investors in the audience (see the link of my post), when he asked them to name just one, *one* asset bubble that did not revert to the mean. The scholars who study this for a living have *never* found one. It amazes me that people still think this is different.
