The great thing about bubbles or euphoric market price increases is that they feel invincible. Yeah yeah yeah. Ok. You don’t feel that way now…or so you say. The pundits all try to say that they don’t feel that now which is why we aren’t in any big danger. But listen to what everyone says when times are good. Their logic is that certain companies are changing the game so their prices will continue to go up. When it comes to real estate, “Look at how much this city is growing by! Real estate will continue to go up!”
Ok. So let’s take a look at both of these kind of attitudes and why they are eventually proven wrong…
Recently, start-up companies have been taken public at an alarming rate similar to the late 1990s with valuations that are obscene…are they as obscene as 1999? I don’t think so. Back then, you literally could have a business plan and get a $1 Billion valuation. Nowadays, you do need sales, but it’s ok if you are losing more money than revenue you bring in (Yes…I said that right…like Uber) and you will still get multiple tens of billions in value…and then Square went public at a value 33% LOWER than it’s last round of private financing. Now, you are seeing more tightness in valuations of start-ups and less hype around them. Look at stocks like Twitter and Square and other companies that have gone public in this new start-up world…they are at or below their IPO prices.
EVENTUALLY “investors” stop caring about the things that drive prices up considerably . Always. Look at every market mania in the last 100 years…there was always a capitulation point where all of a sudden, people cared about profit and valuation. We have seen it twice before in the last 15 years (stocks in 1999 and real estate in 2007) and we are starting to see it again now with stocks and real estate. Does it mean that stocks will crumble and real estate will crumble? Not necessarily but I wouldn’t bet against that either.
There was an article this week from Bloomberg (http://www.msn.com/en-us/money/realestate/san-francisco-tech-firms-see-workers-flee-dollar4500-rents/ar-BBrnfoV?ocid=spartanntp) that talked about how people are now moving AWAY from San Francisco because of the increased cost of living because of rent and home prices. This is the first I have heard of this, but it is the start of something. This is proof of how real estate can’t just go up forever no matter how much demand you have (within reason). At some point, it becomes too expensive to rent or buy and prices level off and/or start to fall until an equilibrium is hit…or sometimes worse.
What I am saying is NOT new. It is a reality of all market increases. At the end of the day, when you pay less for an asset today, you are giving yourself more return in the long run. That’s a fact. The assets future price is NOT due to today’s price…if it was, we would pay whatever it takes for EVERYTHING in the world…but as we have seen in history, eventually markets capitulate and prices drop when euphoria is at play.