Readers suggested a topic on financial bubbles and real estate. "Something I’ve been thinking about recently: Not only do real estate bubbles exist from time to time, but it seems RE is the asset class that is MOST prone to bubble extremes and boom/bust cycles."

"Consider: In the past century there have only been two real US stock-market bubbles (I won’t count ‘87 because we were higher by the end of ‘88). There has only been one real gold bubble; 1980. I wouldn’t count any of the runups in oil prices as bubbles, because they were in response to fundamental shifts in supply and demand. There was only one tulip bubble ever, and so on."

"But RE… we’ve had three in the last 30 years or so: late 70s, late 80s and 2000-05. We also had one in the 20s in addition to various smaller, local bubbles such as Denver in the late 1990s. Look in other countries: The UK has had two in the last 20 years, Germany had one in the early 1990s, SE Asia had one in the mid 1990s until 1997 and of course Japan had the late 1980s… all these bubbles were NOT correlated in time, and formed independently of each other."

"So I ask: (1) do you agree and (2) what is unique about RE that causes this to happen? One answer to #2 may be that RE is the one asset that is most accessible to the public at large, where herd mentalities and ignorance in financial matters are prevalent."

One replied, "Real Estate bubbles continue to happen primarily because they’re not (or haven’t been, until now) as dramatic as more liquid bubbles - e.g. stocks and tulips. In particular - the last two bubbles haven’t really been 'bubbles' per se, in that the non-inflation-adjusted prices didn’t actually go down in most areas. Thus even after a 'small bubble' RE is seen as a low-risk (even no-risk) investment. Contrast with stock bubbles which are obvious risks."

"The only real bad price declines in real estate have been very localized and/or distant history, at least in the US anyhow - Florida in the 20’s, and Hawaii in the 90’s, and the latter still wasn’t that terrible. That’s all about to change."

Another said, "I think that because RE is the only asset class where J6P can get leverage, relatively small price movements (and expecially falls) have an exaggerated impact on the popular consciousness."

"Also, RE experiences can be far more localised than Stock Market ones. Consider that since 1968 the NAR’s numbers have never shown a national full-calendar-year annual decline."

"You could in theory argue that the US as a whole has had zero fully played out RE bubbles in that time, since there have been no actual nationwide busts. (Mind you, have fun arguing that proposition to anyone who lived in the Houston region during the 1980’s.)"

One made a comparison to stocks. "RE has (at least) two differences to the stock market: much larger leverage, and less comparability between objects. One IBM stock is the same as another IBM stock, but houses are not alike."

"Larger leverage might explain the magnitude of booms and busts, and the incomparability might explain the inertia of RE, which also masks some bubbles in retrospect. You have to plot house prices as a ratio to wages or to consumer prices to see the ups and downs clearly (well done by Robert Shiller or by Rich Toscano about the San Diego RE market)."

One had a personal experience, "Interesting points...if one accepts there were no national bubbles in the last ’70s and ’80s (we have discussed local bubbles during those years many times here)."

"Many people certainly got hurt, even in parts of the country you wouldn’t initially expect. (Example: My family moved to NC in 1988; folks moved away in ‘93. Dad lost about 25% on our house in NOMINAL terms. In North Carolina, not Boston or LA)."

"If there was never the 'zero to 100 to zero' effect in RE, the runup and pullback still affected a lot more people, because as realtors™ like to say, everyone needs a place to live, and it’s the middle class’s largest asset."