Additional References
January 2005, EWFF
Real Estate and The uh-oh Effect
One of the final manifestations of the Grand Supercycle peak was a phenomenon that The Elliott Wave Financial Forecast dubbed the “uh-oh effect” just five market days before the NASDAQ reached its all-time high in March 2000. The uh-oh effect was drawn from the following observation from At the Crest of the Tidal Wave:
There are times in history when the percentage of naive investors is so high that occasional warnings from professionals are irrelevant to net market psychology.... [It] is in fact normal behavior at the biggest tops of all.
Over the course of 2004, EWFF has charted the shift of the epicenter of the great peak to the real estate sector, so don’t mistake a recent flurry of warnings about a housing bubble as a contrary sign of strength. The papers are full of references to a potential retreat in home values. Wednesday’s Wall Street Journal notes, for instance, that the number of new homes on the market has swelled to a 25-year high and says the housing market “seems a bit shaky.” But it adds, “A decline would be troubling. Fortunately, such a decline also is unlikely.” Even those that are talking about a bubble refuse to suggest that people should sell their homes or even put off buying one. Economists at UCLA are using the word “bubble” to describe California home prices, but when it comes to forecasting the next year they see only a slight drop of about 1%. “Experts inside and outside the housing industry reject the notion that there’s a housing bubble,” an L.A. Times story about the study adds. “Are We Inside a Bubble Looking Out?” asks the headline in a Sarasota, Florida paper. The author of a book on bubbles concludes that the answer is yes, but says, “We are in the early to middle stages.” We see the same thing occurring with respect to many stock market forecasts for the upcoming year, particularly from those who claim to be wary of the market. While some even acknowledge that the stock market is in a “secular” downtrend, they still forecast continued rising equity prices in 2005. And just to make sure that they have properly covered all the contingencies, many add the qualifier “moderately” before the word rising.
So, it’s a bubble, but it’s a nice bubble that home owners don’t have to protect themselves against. This same complacency surrounded warnings about high stock prices in March 2000 when EWFF reported, “Even if investors have concerns as a result of hearing an occasional warning, they do not act on them.” Financial bubbles by definition always pop, and one of history’s great tip-offs to the fact that they are ready to do so comes when participants see the bubble for what it is and decide not to do anything about it. Real estate is there now, and that is especially relevant because the bursting of the real estate market is the last straw. Its break should mark the start of the all-out economic collapse into depression.
July 2005, EWFF
Some say real estate can’t go down because far too many people are concerned about a real estate bubble, a worry that is now even greater than it was for stocks at the March 2000 NASDAQ peak. But as our section on “Real Estate and the uh-oh Effect” in January explained, it is actually another sign of a top when participants are dismissive of the warnings. The June 22 issue of Business Week asked a roster of economists if housing prices were “soaring unsustainably and due to plunge?” Not one said yes, though one did admit that the market “is caught up in the psychology of a bubble.” The rest agreed that the concept of “a national housing bubble is relatively silly.” The man on the street remains largely oblivious to the debate. A poll by the National Association of Realtors found that only 23% have heard of the potential of a housing bubble, and many didn’t know what pollsters meant by “bubble.” When informed, 37% said that a housing bubble is “somewhat” or “very likely.” The survey may explain the uh-oh effect. Apparently, a significant percentage of the population does not know that a return to earth is implicit in a financial asset’s pole-vault to record heights.
|
