Comparing Real Estate with Equity Market Capitalization

We previously noted the issue of any asset class which approaches 140% of GDP

Mike Panzner does the same comparison, but from a different angle:

"Like the baton handoff from one relay runner to the next, 1999 appears to have been the transition year from the old (bubble) to the new (bubble).

click for larger graphic


Panzner notes:  "While not strictly a like-for-like comparison, the attached graph of
U.S. equity  market capitalization vs. the market value of the real
estate holdings of households, nonprofit organizations, and
nonfinancial businesses (from the Federal Reserves Flow of Funds Z.1
report) provides an interesting overview of the relationship between
the two asset classes from 1990 through 2004."

As I’ve mentioned in the past, I do not a member of the "Real Estate bubble" club. Rather, its an asset class which has run up due to ultra-low interest rates, demographic population trends, and decreasing land availability. That doesn’t mean it isnt frothy and can’t or won’t pull back eventually.

Will it implode, ala 1999 Nasdaq bubble, plummetting 80% in value? Its doubtful . . . it could happen, but would require a full blown depression, and not a mere recession, to occur.

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  1. alex norman commented on May 23


    You’re right — RE is an asset class. The real bubble, as many have pointed out — is in liquidity and credit creation.

    This explosion in credit has most directly impacted home prices and consumption (especially of durable goods in the form of autos and granite kitchen counterops), as Americans have gone deeper and deeper into debt, justifying their indebtedness by an increase in their “wealth” in the form of rapid appreciation of home prices.

    The writer who has most consistently voiced the underlying ‘credit bubble” argument is Doug Noland.

  2. Barry Ritholtz commented on May 23

    I totally agree — its a liquidity driven event.

    I’m fond of pointing out that the Nasdaq doubled over 6 months, from October 1999-March 2000.

    Not coincidentally the Fed cranked up M2 money supply in October ’99, fearing a Y2K run on the banks. The extra cash was supposed to be a cushion against paranoid withdrawers (and survivalists).

    That was on top of the largest infusion of VC cash into tech /dot coms we had ever seen. More liquidity driven pricing fun.

    No coincidence at all . . .

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