ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

Different

Thursday, June 9th, 2011 | Filed under The Greater Fool

Her name is Sarah. Twenties. I think she must be hot. “I love your blog,” she writes, “and have been reading it diligently every since it was introduced to me. You are hilarious.” So far, so good. If you can’t impress chicks with your raw animal swarthiness or Vance Hines pipes, I always say, then use your blog.

“You give me much hope, but I am now wondering what I should do?”

But wait! Sarah has the disease. Bad.

“I have friends who bought apartments about five years ago with nothing or near nothing down, and managed to make at least $100 K profit in three years or less. So how does someone like me, who is slowly paying off student debt, and saving what I can (about $300/month) make $100,000 in a year or two?! Even if I were to invest in the most high risk mutual funds, I wouldn’t make a profit like that… I’d love to hear your advice.”

See what I mean? It’s a world in which young babes think they’re deprived if they don’t score a hundred large “in a year or two” by investing, like, nothing. For those who can’t see the insidious and distorting effects of a housing market bubble on the hormonally young, voila. This is not a good thing. More evidence, as I said recently, that this is starting to fell an awful lot like 1999 on Bay Street.

I well remember roaring around in the suicide seat of dot-com millionaire’s Viper, as his profitless company was raking in huge sums through financing rounds gobbled up by mesmerized, greedy investors convinced what was going up would levitate forever. He’d hired hundreds of employees to do stuff on computers, ride skateboards in the office tower hallways, and play pool in the chef-equipped corporate romper room.

Last I heard he was renting out surfboards from a beach hut somewhere. Viper, repossessed. Investors, reamed.

There is no bubble which endures. Surely, post-Nortel, post-dotcom, post-Bre-X, post-LinkedIn, post-Cabbage Patch Dolls, you would think we’d have learned. But, no. Sarah was probably ten when the Nasdaq lost 80% of its value – just months after everybody said, ‘it’s different this time.’ But nothing’s different when companies don’t make money – they fail. And so do real estate markets when people can no longer afford houses.

Just to make this more poignant, and the need to take cover more urgent, take note of what can happen when bubbles burst. The tech-heavy Nasdaq, for example, peaked at over 5,000 and today is at barely half that level – 11 years later. And the US housing market peaked in 2006, and five years later may now be only half way through the correction, according to the guru.

He’s economist Robert Shiller (the guy who correctly called both the dot-com crash and the housing bust). This week the Yale egghead said a further price decline of 10% to 25% over five years “wouldn’t surprise me at all. There’s no precedent for this statistically, so no way to predict.”

Of course, this would come atop the current 33% cratering in real estate values nationally (some markets, like in Phoenix, are off 80%). And the current housing mess is even worse than that of the Great Depression, because although the percentage declines are similar, in the 1930s the value of everything fell during rampant deflation. This time housing’s fall, relative to the economy, is dramatic. It’s also devastating since most middle-class families unwisely put most of their net worth in a single asset. Yeah, just like most of us.

That probably makes this the worst dive in North American history. And with enough people in Toronto and Vancouver and Calgary thinking like Sarah, it could be a template. Or, what about Japan? Could that be a model? After all, house prices fell for 15 straight years after that bubble burst, improved for a year, and have headed down again. Despite interest rates at about zero during the entire time, real estate shed two-thirds of its value.

Sarah should also know another bank has stepped up to prick the it’s-different-this-time balloon. Now Scotiabank says the post-crisis global housing recovery is shriveling faster than a guy in a cold lake. Why? “Increasing nervousness over global economic prospects alongside rising food and fuel prices and persistently high unemployment are keeping potential buyers on the sidelines.” And this: “The process of repairing bloated public and household balance sheets points to a protracted period of subpar economic growth among debt-heavy developed nations that will restrain household borrowing and spending.”

In fact, when you think about it, how can people anywhere keep paying more for houses when living costs are shooting higher and debt’s at record levels? Answer: they can’t.