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[ThatHawaiiGuy]

Speculative Bubbles in Housing & Stock Markets
by AL MARTIN

The US housing market has now reached the absolutely classic
definition of a speculative bubble in an asset class.

In the first quarter of ’03, median home prices again advanced by 6% vs. the expected advance of less than 1%. Despite the fact that inventory of unsold homes increased to an 11 year high. Despite the fact that residential construction spending has declined for two months in a row. And, despite the fact that mortgage and refinancing applications have declined from their previous peaks for 2 months in a row.

These then are the classic signs of the top of a
speculative bubble-- when prices continue to advance
irrationally, yet unsold inventories of merchandise
also increase to record levels.

These numbers come from the National Realtors
Association and the Mortgage Brokers Association, and
they refer to median home prices in the US.

A classic sign of a speculative bubble is that
prices continue to advance as unsold inventories
continue to rise.

This refers not only to housing, but
any other asset class. Prices are still rising at a
double-digit annual rate, yet the amount of unsold
merchandise moves into new highs. The amount of new
merchandise moving into the market continues to fall.
The number of people applying for loans to buy that
merchandise continues to fall. The question then is –
how much further can prices advance when the available
supply is also advancing and the pool of available
buyers continues to shrink?

(Note: Tulip Buyers - Beware)

These are the signs of a classic bubble in its
final phase. This is my own personal interpretation
that these are the collateral indicators of a
speculative bubble of any asset class in its final
phase.

People ask me on radio shows -- what’s behind
the speculative bubble and I say all you have to do is
watch the CNBC polls they run once a week, when the
question of the day is – do you believe that a year
from now housing prices will be higher or lower than
they are now?

The poll shows that 78% of the people feel that
it will be higher. The same thing can be said about
the bear market rally in stocks. In other words, stock
prices have now rallied so far beyond the underlying
economic fundamentals that you begin to get the
warning signs – increased inventories, reduced
purchasing, and reduced construction which means
reduced replacement or expansion of that inventory.
The construction spending numbers came out negative
again, two months in a row. That is the first time
that has happened in 6 years, yet the market
nevertheless rallied 100 points.

So the hint to our readers is -- stay liquid and
keep your trades short.

When you have two speculative bubbles that are
created at the same time in different asset classes,
in this case two primary asset classes – the
securities markets and the housing markets – and they
begin to peak at the same time – watch out below
because cash becomes king.

An interesting subcomponent of this is to look
at the statistics of the Mortgage Brokers of America
(MBA) of mortgage applications and refinancing,
particularly the application index.

How could this speculative bubble be maintained
in a declining economic growth market where
unemployment is skyrocketing and people have lost
trillions in their IRAs, 401Ks and securities in
general?

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