Trading Places: Real Estate Instead of Dot-Coms

By MOTOKO RICH and DAVID LEONHARDT

New York Times

Published: March 25, 2005



Real estate-crazed Americans have started behaving in ways that eerily recall the stock market obsession of the late 1990's.



In Naples, Fla., some houses have been bought twice in a single day, an early-21st-century version of day trading. Buying stocks on margin has morphed into buying homes with no money down. The over-the-top parties of Internet start-ups have been replaced by flashy gatherings where developers pitch condos to eager buyers.



Five years ago, the cable channel CNBC sometimes seemed like a backdrop to daily American life. Its cheery analysis of the stock market played in offices, in barbershops, even in some bars. Today, "Dude Room," "Toolbelt Diva" and other home-improvement shows are the addictive fare that CNBC's exuberant stock shows once were.



"It just seems like everyone is doing it," Laurie Romano, a 26-year-old self-described real estate investor, said with a giggle as she explained why she was attending an open house this month for the Nexus, a 56-unit building going up in Brooklyn's chic Dumbo neighborhood. She and her fiancé, a dentist, had already put down a deposit on a Manhattan condo earlier in the week and had come to look at another at the Nexus.



Nobody can know whether the housing boom of the last decade will end as the dot-com frenzy did. But the parallels are raising alarms among many economists, even those who acknowledge that there are important differences between homes and stocks that significantly reduce the chances of another meltdown. For one thing, houses are not just paper wealth: you can live in them.



Still, perhaps the most troubling similarity, some analysts say, is the claim that the rules have somehow changed. In an echo of the blasé attitude that "new economy" investors took toward unprofitable companies, the growing ranks of real estate investors are buying houses they never expect to be able to rent at a profit. Instead, they think the prices of houses will just keep rising.



Indeed, the government reported yesterday that sales of new homes jumped sharply in February, in the biggest monthly increase in four years. A strong economy and an improving job market contributed to the gain. But many buyers were also trying to beat rising mortgage rates, which could eventually cool the market.



Adding to the parallels between stocks and housing, some of the doomsayers from the 1990's have returned with new warnings.



"We're going through something very similar in real estate that we did with stocks," said Robert J. Shiller - a professor of economics at Yale, whose prescient book on stocks, "Irrational Exuberance" (Princeton University Press, 2000), appeared just a few months before technology stocks began their slide. "It's driven by the same forces: that investments can't go bad; that it has the potential to make you rich; that you'll regret it if you don't do it; that it looks expensive but is really not."



A new edition of Mr. Shiller's book will be published next month. The cover promises an "analysis of the worldwide real estate bubble and its aftermath."



Premonitions of a bubble on the verge of popping do not ruffle those who are bullish on real estate. In Miami, Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors, predicted that a limited supply of land coupled with demand from baby boomers and foreigners would prolong the boom indefinitely.



"South Florida," he said, "is working off of a totally new economic model than any of us have ever experienced in the past."



The can't-miss aura of real estate has also helped nudge many families to invest more of their personal wealth in real estate by buying more expensive homes and taking on riskier mortgages - much as ordinary workers used their 401(k) plans to bet on company stocks.



There are certainly serious reasons to believe that house prices will not suffer the fate of technology stocks. Not only are houses more tangible, but people do not sell their homes as quickly as stocks, making a panic much less likely. Because of tax advantages, few owners are likely to sell and rent something else simply because local house prices start to decline.



As high as they might seem now on the coasts, home prices nationally have not quite doubled over the last decade; during the 1990's, the Standard & Poor's 500-stock index more than quadrupled.