Definition: An asset bubble is when the price of an asset, such as housing, stocks or gold, become over-inflated. Prices rise quickly over a short period. They are not supported by an underlying demand for the product itself. It’s a bubble when investors bid up the price beyond any real sustainable value. These price spikes often occur when investors all flock to a particular asset class, such as the stock market, real estate or commodities.
Such a bubble is also called asset inflation.
Is Los Angeles real estate in a bubble? If we look at the definition let’s see if it fits the defined definition:
- Prices rise quickly over a short time? Yes. The data I found from the California Association of Realtors only goes back to 1990 but it shows that from 1990-1998ish home prices generally languished. You didn’t get rich from selling your home. You probably bought because it was cheaper or better to own, plus there’s a significant tax advantage.
- They are not supported by underlying demand? Demand means people are looking for a place to live. Not a home to flip, not a home to rent out, not a home to AirBnb.
- Have investors bid up the value beyond real sustainable value? Let me see a show of hands that really believe in their heart of hearts that the piece of shit tiny homes changing hands in El Segundo for one million US dollars are really worth a million dollars? Alex and Bill put your hands down!
So what happened in the late 90s? Remember the tech bubble? You could throw a dart at the Nasdaq 100 and double your money. Cicso, Yahoo, Netscape, AOL…..You could do no wrong. People all of a sudden were making real money investing. None of this mamby-shmamby ~7% per year and be happy. They were doubling and tripling their money. I know a guy who was the head of sales for Netscape when it went public. His life changed in a few hours. He never had to work an honest day in his life.
What do people do with excess money and the winnings they didn’t have to work 40 hours to attain? They spend it….which causes inflation. When too much demand is chasing the same goods, prices rise. Now people are making money when they sell their home because their is a pool of people with a lot of extra money to spend. The seller takes their proceeds and buy a bigger home and the cycle continues. Then there’s a psychological factor. FOMO. The Fear Of Missing Out. Which attracts more buyers, it attracts investors, and flippers and new business models that have nothing to do with finding a home to raise your family in.
But this time it’s different! “Last time it was about phony mortgages and teaser loans”….But was it? A recent study by the National Bureau of Economic Research pointed to the fact that it wasn’t bad mortgages but flippers/investors that caused the subprime crisis. Because when you think about it, the crazy, easy mortgages was a business model aimed at capitalizing on the appetite of investors and in-turn the FOMO people.
If it walks like a duck, quacks like a duck….
How does it pop? How violent of a pop will it be? Will it hurt? That remains to be seen. Grab your bucket of popcorn, sit back and watch. Keep an eye on the Bitcoin “investors”… I too participated in the bitcoin bonanza. I bought around $700 (yes and now it’s $7640) and sold at $300 because it was just a bet that was not paying off. I had no conviction that Bitcoin was an amazing investment opportunity. It was a bet that it would be worth more in the future than what I paid. Was I wrong? It doesn’t matter. I lost over 50% of my money in a short time frame and I cut my losses. Because it could have easily gone to $0.