Tuesday, April 19, 2005

The Lessons of Bubbles

Thanks to Dad for the link.

I had thought that everybody had learned a big lesson from the dot-com bubble of the late nineties. What was that lesson? Bubbles pop. Everybody goes around saying that lessons were learned, that we won't make that mistake again, but what's going on now?

The Housing bubble.

That's what everyone calls it. It's another bubble. We all know about bubbles now. We've learned valuable lessons from them. Remember what bubbles do? They pop.

But I've had a number of conversations with people who have no doubt that this bubble will either just continue to climb (which is a view absolutely divorced from reality), or that housing prices will reach a nice little plateau and just stay there for a while.

Housing prices are already perilously high. A hell of a lot of people can't afford to buy houses, and the ones who already have them are getting money just for the fact that they happened to have them at the right time. If the appraised value of your house goes up, your equity goes up, and you can take out home equity loans for a lot more money. What's more, the rising prices makes demand high because so many people want into the free money business, and that drives prices up even higher.

So in this "ownership society," fewer and fewer people every day are able to own houses.

But we've got to be cognizant of the lessons we've already learned from bubbles. We've known this since we were two years old.

Bubbles pop.