Wednesday, June 29, 2005

Real Estate Bubble, Like Dot-Com Bubble

As I have argued before, the run-up in house prices in areas that shouldn’t see any increase reminds me of the run up in prices of low-growth, or no-growth companies back in 1999. Back then, maybe there was an argument to be made that Cisco should continue to trade higher because at least Cisco made money. On the other hand, companies like should have never even gone public, let alone see their stock prices rise 50% in one day. Similarly, maybe there is an argument that Manhattan real estate should go higher, since the city attracts tons of foreigners and it is an Island with limited places to build. On the other hand, places like Cleveland probably aren’t attracting many Italian countesses looking to pay a premium for a penthouse overlooking Lake Erie and I would imagine there are plenty of places to put up a new building.

["House price bubbles in these Midwestern cities, where manufacturing is king and activity is on the decline, flashes even bigger warning flags, in our opinion," said Sheryl King, the Merrill senior economist who wrote the report.

With those kind of examples, it's easy to see how comparisons to Wall Street's technology heyday come to mind.

Back in the late 1990s, the major market indexes soared; among the most extreme cases was the fivefold gain in the tech-heavy Nasdaq composite index. That momentum boosted stock prices all around.]



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