> From dhenwood at panix.com Mon Apr 5 07:20:43 1999
>
> >do bubbles always burst?
>
> Can't think of one that hasn't ...
>
> Well that's a non-starter; since a bubble that hasn't burst always
> has the potential to burst, this seems a little too smug to me.
> But there is precedent for things that have appeared "overvalued"
> continuing to hold that value; California real estate for one.
I live in California, Jordan. Plenty of people have lost money in California real estate because it very much IS subject to periodic bursts of over-valuation.
The Antelope Valley, scene of recurrent white racist violence, is in part a product of one such burst, driven by Reagan's military buildup during the 1980s. It left plenty of folks high and dry with upside-down mortgages -- owing more than the value of the home.
Less spectacular, but indicative of the widespread low-profile nature of things: My father is just moving out of a mobile home park in Hemet, a desert retirement community. The community itself is booming -- population just keeps going up and up and up. But the resale market for mobile homes died a couple of years after he moved in and has never recovered. I'm not sure of all the details, but I'm pretty sure he's losing ALL the equity he has in it.
In Santa Monica, just a few blocks from where I used to live, there was a bustling shopping district along Main Street in Ocean Park that had grown enormously during the 1980s. Then the city finally did it's long-contemplated renovation, converting the downtown 3rd street into a pedestrian mall. The result just devastated the Main Street district. It's making a comeback now, but it's still nothing like it once was.
Big picture now: The entire LA area fell into a real estate slump in the late 80s. Lots of jobs left, and people who were lucky enough to be offered transfers faced an atrocious market trying to sell their houses. This slump has long since ended in some areas, but it's still continuing in others. Even the premier real estate featured in the LA Times "Hot Property" column (devoted to celebrity real estate deals) still contains deals struck at less than the original asking price.
Yes, enourmous fortunes have been made in California real estate over the past 150 years, but enormous fortunes have been lost as well. Just because you've got a long-term trend -- even a particularly strong one -- doesn't mean you can't have speculative bubbles as well. In fact, the long-term trend creates ideal conditions for generating speculative bubbles.
And that's precisely what's going on right now with internet stocks.
There's an old joke.
An organic chemist says, "Half of what we're teaching our students is just plain wrong, and we won't be teaching it in 10 years."
"Why don't you just stop teaching it?" He's asked.
"We have no idea which half it is." He replies.
With internet stocks, half would probably be a VERY good percentage.
There's another point, however: opportunity costs. Speculation has wide-ranging opportunity costs which are very real, but rarely figured into economic modeling, forecasting and decisionmaking.
Real estate speculation in California has not only taken money away from all kinds of other endeavors, it has taken LAND away from all kinds of other endeavors. What is "rational" during a speculative run-up in land "values" generally gets locked-in. It's difficult, if not impossible to revisit the development choices made. Too late we've begun to realize the enormous fixed costs we bear from having created such a speculation-driven built environment.
This is hardly news to environmentalists, land-use planners and the like. But in the early 90s, it was suddenly brought home to EVERYONE as the downside of sprawl became another publicly-recognized negative factor inducing people to leave the LA region, and discouraging companies from locating here.
Okay, last but not least: What happens when a Northridge-style quake hits downtown LA? Nothing is certain, of course, but it's possible folks could look back 75 years from now and regard the last 60 years of investemnt in Southern Clifornian real estate as one big speculative bubble. After all, we've never incorporated the true costs involved. We've never fully insured against earthquake loss.
A slower growth rate, fully insured, less driven by speculation (and the political forces mustered in its service) could have produced a much better built environemnt, with far lower fixed costs, fully insured and far more capable of surviving anything that the earthquake gods might have in store for us.
But, that wouldn't be capitalism, now would it?
-- Paul Rosenberg Reason and Democracy rad at gte.net
"Let's put the information BACK into the information age!"