Irrational Exuberance

I was watching the news late last night, and I saw a short story done on Robert Shiller. He's the author of "Irrational Exuberance", which predicted the tech bubble and its burst in 2000. Apparently, he's back with a second book, "Irrational Exuberance 2", and this is about the impending burst of the housing market bubble.

According to Mr. Shiller, housing prices are at extremely high levels, when you compare to historical data (which he has collected back into the 1800's). Even when the price data is converted into current dollars (using factors like inflation and other economic data), the prices that we are looking at for housing are exponentially higher than our forebears.

While there are still many who think that the housing prices might level out or soften, the call of "bubble" is coming from more and more areas.

Should you be worried? Well, maybe. If your household debt load is too high, you should be doing everything you can to reduce it. You might want to be accumulating some savings. You should be paying as much off against your mortgage as you can, so that you can ensure that you have as much equity as possible. This is all common sense stuff. But why is it more important if there is a tech bubble? Because if you have to renew a mortgage, and you are required to provide a current assessment of your home's value, you don't want to suddenly find yourself with a problem because you don't own a big enough percentage of your home! And this can happen if values drop suddenly.

However, beyond the common sense things, you can likely sit tight, particularly if you have a solid job with some security.

I've lived through one nasty "bubble" in my local housing market. Places lost up to 25% of their value over a couple of years, and then the market was completely flat for another 5-7 years after that. Throughout that period, I kept making my mortgage payments, and stayed the course. I even moved my mortgage from one bank to another. Because I was a good customer and had a good credit rating, I was never asked for a current appraisal of my home, even though I (and the bank) knew it had lost value. By the time I sold that first property about 13 years after I bought it, I managed to get about a 10% increase over what I had paid for it, and I had built up over $50,000 in equity.

So, should you worry about the housing bubble? Well, not if you are already in a home you enjoy and you are comfortably paying off your mortgage. After all, no matter where you live, you'll pay money for it. However, if you are looking to get into the market, you might want to think carefully. If you would be 'stretching' to do it, it may definitely not be the right time. Furthermore, if you are in a home and very stretched to make ends meet, you might consider a temporary downshift to rental accomodations, so that you get your profit out of your home now.

But, it all has to be taken with a grain of salt. After all, the bursting of a bubble is as much a psychological phenomena as anything else. It's like a run on a bank; the fear creates the conditions for the run and then the fear builds on itself until more and more of the money in the bank's vault goes out. The fear becomes a self-fulfilling prophecy.

Michael

0 comments
Advertiser Links for mortgage