Bubble Files, Part 1: What 30 Plus Years in Real Estate Will Teach You about Bubbles

Editor’s note: Recently, we sat down with Lee Adler to take a deep dive into his real estate background and experience. He shared with us how he identified the housing bubble of the 2000’s and what warning signs he saw leading up to 2007/2008 financial crisis. So today, we want to share with you a recording of our conversation with Lee, as well as the transcription. To take full advantage of a real estate profit opportunity in an all-star stock at a bargain-basement price through a brand new service, click here. It could deliver you a nice return of 40% annually over the next 5 years.

I worked in real estate off and on for many years – starting in the late 1970’s, boots on the ground, selling real estate as a young man in Center City, Philadelphia.

There at that time, we witnessed a localized bubble, and I saw prices jumping 25% to 35% per year. And it was very clear to me then that this simply wasn’t sustainable. Sure enough, the market did seize up, volume disappeared, and prices came down sharply.

I worked in and out of that business during the 80’s – and then moved to Florida in the late 80’s and worked as a commercial real estate appraiser.

And there at that time, we were in the midst of a commercial real estate bubble. The Savings and Loans and the commercial banks were issuing credit at insane rates. And the prices of commercial real estate – office buildings, shopping centers, apartment complexes, etc. – were rising rapidly. I saw the same kinds of price increases of 25%, 30%, and 35% per year. I saw international investors from Asia and Europe come and buy trophy properties at prices that were not sustainable.

The crisis began to gather in the late 1980’s, and I saw it collapse. By the early 1990’s the collapse had happened, the bank regulators had become very tough, and some of the fraudulent banksters were being prosecuted. Many of the properties had gone through bankruptcy and mortgage foreclosure. And many of the properties that I had valued correctly in the first place came back to me for reappraisal. So by having done honest appraisals in the first place, I found a lot of work during the period of the readjustment and recovery.

And the same things I saw happening in Philadelphia and Florida, I saw happening again in the 2000’s. I was a commercial real estate appraiser from 1988 until 2001, which is when I started my market letters and moved into the publishing business. During the early 2000’s, I saw a lot of shenanigans, a lot of fraud, a lot of excessive lending, and a lot of inflation – and it was all corrected very violently by the crash of 2007 and 2008.

These Warnings Signs from Prior to 2007/2008 Show You Exactly How to Spot a Bubble

So I’ve had firsthand experience seeing bubbles and how they behave.

One of the keys is that when you see prices going up very rapidly, it’s typically never sustainable. When we see 25% to 35% annual inflation, typically that’s a sign that we’re in the terminal phase of a bubble.

One of the most interesting resources that listeners can pick up is the Charles MacKay book, “Extraordinary Popular Delusions and the Madness of Crowds,” which talks about bubbles going back to the Tulip Mania of the 1600’s in Holland.

But you can find examples of bubble everywhere. The gold bubble in the 1970’s, the real estate bubbles that I went through – they all follow a pattern.

All bubbles have a similar shape and duration, and if you look at a chart they look very similar. They tend to emerge from a base, such as a bull market. 4 or 5 years from the emergence of the base, they tend to become exhausted.  All the buyers are in, the bubble has found the “last greater fool.”

The Greater Fool Theory: People in the last stages of these bubbles figure they’ll get in on the action and then they’ll sell it to some other fool, but unfortunately they’re the last fool and there’s nobody to sell to.

We saw this happen recently with Bitcoin. When bitcoin crossed $10,000, that’s when everybody piled on and within a matter of weeks it was worth almost $20,000. So that kind of parabolic, nearly vertical move is usually the end stage of a bubble.

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The other thing that you want to look for in order to identify bubbles is volume. If you have data on transaction volume, you’ll see that volume precedes price.

In 2004, as the prices were going crazy in housing, the sales volume was very high. And then in 2005, especially in Florida when I sold my house, that volume was at radical levels. Shortly thereafter in October, that was the end of it – volume dried up. Even though prices continued to creep higher, there were very few sales and nobody at that point was able to sell their home.  It was the Wily Coyote Moment, when Wily Coyote has already gone over the cliff and is spinning his legs but doesn’t realize he has gone over the cliff already.

In 2006, I took part in a radio interview and the interviewer asked me what sellers and buyers of real estate should do, and I told the interviewer that it was already too late, that even though prices were still rising there was simply no transaction volume.

We’re in a Housing Bubble Now. Here’s What to Do

Right now in the housing bubble, we’re starting to see volume decline in the housing market. Volume precedes price, and as the demand dries up, as the affordability issue rears its ugly head, that’s another key sign that the gig is up and there’s no more upside to be had.

The other thing to pay attention to is how the pundits, the analysts in the mainstream media, are regarding the current state of things. If we see that volume is drying up, and at the same time the pundits and policy makers are saying that there’s nothing to see here, that you should just keep moving along – well, you have to realize that their job is often to forestall panic and they may be saying one thing behind the scenes and another thing to the public.

So you have to look out for that discontinuity between what the pundits and policy makers are saying and what the reality of the marketplace is. The more extreme that becomes, the more dangerous the environment.


Lee Adler

6 Responses to “Bubble Files, Part 1: What 30 Plus Years in Real Estate Will Teach You about Bubbles”

  1. Roy F. "Fritz" Schoonover

    OK, so where’s the transcription of the audio file? I do appreciate Mr. Alder’s comments very much, but I also can read much faster than most folks talk, particularly when there’s a stammering interlocutor involved.

  2. I was also there though the real estate boom and bust history as an investor/landlord. You “speak” the truth. The trick is to not be the “the greater fool” ! Thanks for your insight and writings. What do you think of REITs ? Looking forward to Part 2

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