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Looking In The Mirror: Speculative Stock And Housing Markets

Here’s a pretty interesting comparison of two recent asset busts by Greg Carmwell in Goldseek called Housing: Game Over [1].

Of course its always easier to look in the rear view mirror.

Dot and Tele Com
* Public Participation: Enormous numbers of day traders.
* Borrowing: Huge margin debt and massive corporate spending on technology.
* Fraud: Illegal IPO allocation, fraudulent accounting, and now back dating of stock options. Just think of Enron and Worldcom.
* Questionable Supply: Junk companies going public in which most of them failed.
* Crash: NASDAQ dropped 80%.

Housing
* Public Participation: Large numbers of condo flippers and investor/speculators.
* Borrowing: Extraordinary amount of mortgage lending much of which is highly risky given the repayment terms and interest rate risk.
* Fraud: Widespread appraisal fraud and false information provided on loan applications encouraged by shady mortgage brokers. Massive accounting irregularities by Fannie Mae and Freddie Mac.
* Questionable Supply: Massive numbers of condo conversions of basic apartments and a large amount of new condo construction.
* Crash: Housing prices are falling rapidly in areas that have experienced great appreciation, inventory is exploding, and new home sales have dropped 25% from its peak.

Housing markets that had significant investor activity don’t speak for the entire housing market not unlike assuming NASDAQ stocks behave like NYSE stocks. Still, its pretty interesting.

Actually, his points made about housing wouldn’t be as digestable without the recent disclosures of the widespread fraud and lack of understanding of risk by sub-prime mortgage investors.