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Pardon for the word "greed" which has a negative connotation but for which, I simply mean "human desire for capital gains" as far as this article is concerned. "Collective greed" in this context refers to the collective desires of the American people with regards to the bubble phenomenon that has occurred (dotcom bubble) and is occurring right now (housing bubble).

The following events are common with respect to these bubbles:

1. Stock prices rise (in housing bubble, housing prices rise)
2. Stock prices continue to rise until it reached its peak (same with housing prices)
3. Stock prices decline or evaporate (housing prices, on the other hand, simply decline)

David Lereah, on the same Freakonomics article, wrote from an economic perspective:

Bubble is the wrong imagery for today’s housing markets. Bubbles inevitably “pop.” A more useful image for the housing markets is a balloon. Balloons expand and deflate. It is clear that air has come out of a number of local balloons across the nation, particularly in California, Nevada, Arizona, Florida and some selected metropolitan areas in the Midwest and Northeast regions. From a home sales perspective, the magnitude of today’s real estate downturn is not meaningfully different from our two most recent real estate downturns — 1990/91 and 1980/81. For example, the 80/81 recession resulted in a 48% drop in existing home sales. Existing homes sales have dropped by less than 20% so far in the 2006/07 downturn. However, unlike real estate recessions in the past, today’s downturn offers two unfortunate residuals — a drop in home prices for the nation as a whole, and a serious run-up in foreclosures.

Amir Korangy added:

Let’s talk about what a bubble is. A bubble exists when the ratio of median existing home prices is about 6 or 7 times greater than per capita income. If you compare the census with prices in New York, they seem reasonable. Bubbles have certainly existed in particular regions, and prices in those areas could be brought down by a range of factors. In 2005, when the entire country was experiencing tremendous real estate growth, prices in Canton, Ohio dropped continually. Drops like that contradict market fundamentals, increasing speculation and participation in the market by people who normally don’t get involved in such things…

I’ll leave the nitty-gritty to the economists. But for the sake of simplicity, these are the results of the bubbles we are talking about:

For the dotcom bubble,

1. dotcom stock prices either declined or simply evaporated. Why? Because the internet is still in its infancy, says Answers.com. The dotcom entrepreneurs are figuratively pouring money on a shaky foundation. Ecommerce and web standards have not matured yet.
2. dotcom companies either perished or are still thriving. Those companies with ludicrous product/service offerings simply were not able to deliver or inevitably doomed to failure. As a result, they went into bankruptcy. On the other hand, those dotcom companies with economic fundamentals intact (like eBay, PayPal, Amazon etc) survive the dotcom craze and are still thriving.
3. dotcom stock corrections or awakening to true valuations of dotcom stock prices.

For the housing bubble,

1. Housing prices expand and deflate (I like David Lereah’s description that it should be called housing balloon, instead of housing bubble)
2. Housing price corrections. There are a lot of factors involved but generally, we are seeing housing prices that have reached its peak already and are bound to decline until it reach its market-acceptable valuation and stabilize

If you really look into these trends, it is partly caused by  "collective greed". People have a natural tendency for capital gains once they sold their assets (there’s nothing wrong with that) but once they stretched their asset prices to the limit, the market will reach its peak and is bound to correct itself until it reaches its stable point. I’m not saying "collective greed" is the sole cause of the housing crisis that is happening right now. There are a lot of factors including the weakening US dollar, the toll being caused by the unpopular Iraq war, subprime mortgage delinquency, and others, and that is worthy of another discussion.

Whereas the dotcom bubble happened in a certain place only (the Silicon Valley), the housing market is widely distributed across the nation, and with government support, can absorb the impact of losses.

Right now, it looks like Uncle Sam is awakening to its senses, and is exacting order in the house (that is, order in housing prices and family members as well).

This entry was posted on Thursday, August 16th, 2007 at 8:54 am and is filed under Patterns. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.