Tuesday, August 16, 2005

Will It Really "Pop?"

A lot of people seem to be of the impression that when the housing bubble pops, they will know immediately, as though there will be some instantaneous burst that will be featured on the evening's newscast with an announcer declaring "The housing bubble finally burst today at 11:02 a.m. Pacific Standard Time." But that's just not how it works.

Think of the bubble burst as being like the start of a drought in Southern California. At first you're just going to notice that it hasn't rained for a few months. Happens all the time here. Only after many months, or a year without rain can you know for sure that you're in a drought. And only then, in looking back over time, can you tell when a drought began. Determining where a housing bubble pops uses much the same approach.

Only after many months, or more than a year, will you be able to see when this housing bubble pops. Looking back you'll notice that houses started staying on the market longer, prices began dropping and inventory began swelling. Until then, we'll all keep watching the street corners for the silk flags to multiply.