Real estate market or stock market, be very afraid of "this time, it's different".
A newsletter from a stock brokerage reminds me that the infamous "irrational exuberance"—or its cranky lesser-known cousin, irrational pessimism—can blind us to the time-proven truths of the marketplace.
I'm no expert on the stock market, but I follow it with one eye because its truths can often be applied to the real estate market, with the important qualification that each market deals with a very different asset class.
The newsletter article that caught my eye discussed "what we've learned in the five years since the peak" of the stock market.
One thing I hope we've learned is that the mantra of the 1990s stock market, "this time, it's different", was wishful thinking used to whitewash an out-of-control market. With the Nasdaq Composite Index about 60 percent below its March 2000 peak as this is written, you don't need a Ph.D. to know that the time-proven truths of the financial markets didn't go away. They were just hiding under the bed. Not that a Ph.D. in Economics seems all that helpful in understanding markets.
Today's real estate has two versions of "this time, it's different".
One version is also born of a red-hot market and the overwhelming confidence that, this time, prices will only go up! up! UP! It seduces the credulous because home prices have always gone up! up! UP! over the long term. But they've also gone down! down! DOWN! in the short term, and betting against this time-proven truth is a risky bet indeed.
But it's also risky to bet on the flip side of the argument, irrational pessimism. Anyone who won't buy now because he or she sees the housing market slouching toward an Armageddon of over-the-top home prices that no one can afford or wants to pay is betting against two time-proven truths: the enduring appeal of real estate in general, and the appeal of the San Francisco Bay Area lifestyle in particular.
Do some investigating and you'll discover that the skeptics been saying "this time, Bay Area home prices have gone as high as they can" since the early 1970s. Often they've been right for a few years, yet today prices are hundreds of times higher than they were back when we had a Ford in the White House.
Thirty years later home prices are still attractive enough, to enough buyers, to create enough demand to keep home prices going up enough to keep homeownership financially (as well as emotionally) desirable. No, you won't find that sentence in any economics textbook, but it does describe a neat trick for any market to pull off.
Come to think of it, that's no trick at all, just another time-proven market truth in action.