The sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them, disproportionately affecting poor homeowners who then stopped spending. What explains these different outcomes? In the forthcoming book, “House of Debt,” we argue that it was the distribution of losses that made the housing crash so much more severe than the dot-com crash. Why the difference in outcomes when both caused approximately the same loss in household wealth? The housing bubble led to the worst recession since the great depression. In 2000, the dotcom bubble destroyed 6.2 trillion in wealth, 7 years later the housing bubble destroyed 6 trillion in wealth but the outcomes for the economy were drastically different. 538, a statistical analysis company owned by Walt Disney/ABC, did an interesting look back at the tech bubble and the correlation to real estate prices. With many major industry participants making a correlation between the tech bubble and now, what does this mean for real estate prices. If 2022 is like the tech bubble, what does this mean for the economy? This tightening ultimately was the impetus for the dot com bust. The setup is eerily similar today as the federal reserve has continued a loose monetary policy a bit longer than they should of and now they are behind the curve as inflation is running substantially higher.įed Chairman Alan Greenspan, seeing the flood of money into risky start-ups, pricked the dot-com balloon with monetary tightening in the spring of 2000. In comparison, the rate of growth of the money supply in the fourth quarter of 2000 was 9.2% (–2.8% after seasonal adjustment). In the fourth quarter of 1999, the Fed expanded the money supply at an annual rate of 22% (9.6% after seasonal adjustment). The Fed mistakenly created too much money in the fall of 1999 in order to fend off the expected deflationary impact of the Y2K bug-effectively pouring gasoline on a smoldering fire in the stock markets-and banks and brokerage houses used some of the excess liquidity to fund the share price bubble. How does today compare to the tech bubble? Bloomberg came out with a similar article: “ Unrelenting plunges in the Nasdaq ring a dot com bust alarm bell”. Morgan Stanley came out with a client note that stocks are now more overvalued than during the tech bubble. This recent sell off especially in the Nasdaq which is heavily tech weighted is bringing back memories of the tech bubble in the early 2000’s. In a nutshell the market got ahead of itself and the recent rises in rates are prodding investors to give a higher “risk premium” to once high flying companies. Last year the average return was 29% compared to the long term average of 7%. For example, there was a craze for certain stocks, like gamestop, that had no fundamental reasoning. Much of this liquidity flowed into the stock market with many speculative investments. The accommodative monetary and fiscal policies of the US government have “flooded” the market with liquidity over the last several years. This has forced the federal reserve to radically change its tune and wake up to the idea that interest rates will need to rise and rise faster than the market anticipated. The sentiment really began to shift as inflation numbers continued to run higher throughout last year and are forecasted to stay high throughout 2022. It seems like overnight the stock market went from a darling to a dud as investors started running for the exits. How will this impact real estate? What happened when the tech bubble burst? Is the 2007 housing bust a better metric for real estate than the tech bubble? Why is the stock market falling? Morgan Stanley just warned that stocks are more overvalued than the tech bubble. As I am writing this blog, the market has already plunged 10% to kick off the year. It has been quite the year for the stock market.
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