3/14/2007 – The Reality of the Housing Market

Investors who keep seeing signs of life in the housing market are grasping at straws. The tech bubble in the late 1990s provides some valuable insights. Looking back it is “obvious” technology stocks were in a bubble. Funny, however, how most pundits on CNBC were bullish on tech stocks for most of 2000. The difficulty in recognizing the tech bubble when it was happening was that the fundamentals were fantastic. Venture Capital companies funded every business plan imaginable. These businesses basically bought advertising and computer equipment. Feeling a bit panicky Corporate America felt they were falling behind and did the same thing. Most large-cap tech stocks had tremendous revenue and real earnings growth even in late 2000. The reality that doesn’t get a lot of attention even today is that tech company’s FUNDAMENTALS were in a bubble. Investors placed a high multiple on bubble fundamentals just as the fundamentals collapsed. The result was an 80% decline in the NASDAQ. 

Until recently the fundamentals of the housing industry were in a bubble in part caused by irresponsible financing. Sales of new and existing homes moved far above trend line for several years. Housing fundamentals are now in retreat. Things could really get ugly if interest rates or unemployment start to rise. Regardless, like tech stocks before them, the recovery in the housing market will take years, not months, to work off. There will be many false starts, but don’t be tempted because these will likely be sucker’s rallies.