My 1st Million At 33 - yes, you can do it too

I have observed how the 2000 stock bubble progressed. And I must say that the 2005/06 real estate bubble progressed in the similar fashion. Time after time, at the peak of blow-up, the participants feel invincible, but just moments afterward, everything is downhill. When the party is over, one after another very gradually wakes up from their hangover.

The similarity that I observe is that at the last hooray to the peak, all classes of stocks or all classes of real estate will participate in the bull market, with the least favorable class turning out the fastest and/or biggest percentage gain. To illustrate my observation, I am going to use the small cap stock (the least favorable or known stock), mid cap, and the large cap stock (the most well-known stock) for classifying diffenrent sets of stocks. The bull market usually progress like a marching army, with gradual increase in the valuation in every class of stocks. When the large cap advances with increase in P/E ratio, it becomes more expensive, and people will start to seek the next class of stocks, mid-cap or the lesser known companies. Once mid-cap is fully valued compared to large cap, people go to the next class to small cap. As the bull market raises the valuation of all classes of stocks, investors try to find the relative “value” stocks, and therefore keeps the relative valuation in check. Although the marching order is not always necessarily the same every time among different classes of stocks, but as more money chases finite amount of stocks, most stocks will rise in value.

But the signiture of the peak of bubble always lies in the stratospheric rise in the very little known stocks. At the peak, there is so much liquidity that more and more very little known companies come to the front page of investors’ screen. The speed at which investors pour the money into “hot tip” becomes faster and faster. But also the amount of money required to sustain a growing bubble is increasing even faster. Remember Pet.com, Home Grocery.com, salon.com, etc. At the end, when bubble pops, these small companies are abandoned at the equally fast speed, while the larger companies try to hold on to price levels from the waves of selling. Eventually, all three classes of stocks go down in the bear market.

Now, back to the US real estate market, you see the same phenomenon. If you take California and New York/Florida as the large cap stocks, and then other coastal regions as mid-cap, and then south and mid-west regions as the small cap, you can see similar progression of a bull market. Within each market, it can be further divided into large to small cap. For example in California, the major metropolitan areas of San Francisco, Los Angeles, Orange county, and San Diego are the big cap, and the more remote area to these centers are mid cap, and the small caps are the most remote area. It’s like a mathematical fractal, same ratioed structure exhibiting itself at different level of magnification. You can even go further up in scale, treating USA, UK, or Spain real estate markets as the big cap, and then go down in scale. Or if you like, you can use luxurious residences, single family, and condos to do your classification. In any cases, at the peak of the bubble, you will see some “small cap” goes to the sky. It’s important to understand that only some of the small cap will do so, due to overflow of money liquidity. But no amount of money can let ALL small cap goes to the sky in a short time. If you’re lucky, you can catch the wave and sell at the height. If you’re not lucky, the hot money may not even hit your area.

Therefore at the terminal stage of real estate bubble, you should see dramatic rise in some of the most remote area from cities, rise in the values in regions far away from coastal regions, rise in values in smallest condos, and rise in values in the oldest and less favorable houses. All of these things have happened already in the USA, with some crazy ~50% rise in housing prices in areas at Las Vegas, Arizona. Or in California, you saw quick rise in values in central California like Bakersfield, or Inland Riverside counties. Or with the oldest houses (20 to 50 years old) selling at the same valuation as the new houses. From those phenomena, I am certain that real estate bull market was a bubble.

There are many unethical real estate agents out there who keep brain-washing the clients that any time is a good time to buy a house, or that house always rises in value for the long term.(yeah, how long is long term?) I strongly disagree. Now it’s a really bad time to buy into housing market if you are a renter (assuming that your area has undergone through a bubble). I believe that real estate prices in California will not exceed its recent peak probably for another 8 years. On an inflation-adjusted basis (based on true CPI), I believe real estate prices in California will probably not exceed its peak for another 12 years. You can laugh at me for my wacky un-popular thinking. But for those people who are at least a little open-minded, I want to tell you to just buy the necessary housing that you need, and no more. Investing in real estate in the bubble zones will not make you rich. And if you can wait 3 years before buying, that may be the best procrastination that you can ever do.

I sincerely just want to save you some money. And certainly I could be wrong. Please make your own judgment. You could try out my Rent vs Buy calculator, if you want to see how much you can save by renting.