Raybyrnes , I don’t think one needs to be arrogant to think that it is the market that is nuts, and not oneself. In 2001 people were claiming a housing bubble in LA, simply because prices had gone up–which they hadn’t been doing for years. But one look at the fundamentals would show that it likely was coming out of a period of undervaluation.
Looking at those same fundamentals, the markets in SoCal are excessively overvalued by most every metric.
The only possible alternative to massive overvaluation is the emergence of a new economic model, and while this is possible as with the industrial revolution where manual labor was rendered ever less valuable, it is unlikely. To what does one attribute a completely new valuation for US RE? The internet? Globalization? Over the long term, both tend to drive prices down, not up, as better information and easier access to other markets brings efficiency.
The last time I heard that hundreds of years of business sense and economic theory was the old way of doing things was in the late 90’s stock market. Many people were making serious money day-trading without knowing what they were doing, while others that “knew better” were saying how crazy it all was. It turns out, it was crazy but some people still got very rich off of the insanity. In 1998 I was expecting it to crash, but over the next year or so, people were still raking it in–then it crashed. The same people that said the enormous P/E’s were justified due to the “new economy” become raving bears overnight, now claiming the market was dead!
The really interesting parallel here is that it took another 2 years for the market to bottom–and that is with highly visible, highly liquid assets (one may see the actual price of their Google stock whenever they choose–unlike houses, and may sell their shares whenever they choose for as little as $10, unlike houses) Still it took 2 years for the market to bottom. How can anyone expect that an illiquid, highly opaque market can find a bottom in less time is beyond me.
There are few positive surpises left, such as loose lending practices or low rates, huge inflow of foreign capital, to boost prices. Significant salary increases might do it, but businesses tend to see that as labor costs, which are inflationary. At the same time, several negative surprises are possible, such as natural or manmade disasters, increase in unemployment, high inflation, much higher rates, strict lending practices (already happening), slowdown in foreigners purchasing our debt or massive foreclsures as Wall Street pulls money out of mortgage backed securities (already happening).
It is true that no person knows what will happen, but in terms of mathematical probabilities the expected value falls heavily on negative rather than positive appreciation.
-one muggle
