The DotCom Crash Revisited

woginuk writes "At 9:00pm GMT today , it will be exactly 5 years since the Nasdaq reached its highest level, 5048.62. From there on it has been downhill all the way. Most of us have been affected by it, one way or the other. The Guardian has a story looking back on the moment and succeeding events."

Comments

Real Estate Bubble - Stock Bubble

[SpaceCadetTrav]

The rampant speculation has moved right into real estate. Prepare for the next great crash, with greater consequences.

Re:Real Estate Bubble - Stock Bubble

[cmowire]

No, it's the exact same thing.

If you buy stock in... say... Google, there's a certain intrinsic value because, if they were to liquidate, they'd have their racks of hardware, their office space, etc. There's money to be hand to buy up the patents and trademarks and everything else...

Much the same way as there's a certain intrinsic value in real estate. You need to remember that part of real estate is all about location, which is not intrinsic.

In both cases, the price you pay is the intrinsic value of the item, plus all of the abstract hard-to-quantify stuff. If all of the tech firms moved out of Silicon Valley, there would be a lot less demand for land in the area, for example. The value of the property goes down, even though "they aren't making more land".

Re:Real Estate Bubble - Stock Bubble

[Edward Faulkner]

Save for a minor dip in the 90's housing prices have never fallen in 22 years.

That's precisely the kind of thinking that makes crashes possible. When everyone believes something is a safe bet, they discount risk more and more. Market phenomena often work themselves out over decades, which is beyond most people's attention span.

Take stocks for example. From 1980 to 2001, stocks were the right place to be. When a trend lasts that long, it changes people's attitudes. In 1980, most people were very nervous about stocks, because they had spent the previous couple decades sucking.

If you bought the Dow Jones in 1929, you had to wait until 1956 just to break even. And this isn't such a rare outlier. If you bought in 1966, you didn't break even until 1983. Once you include taxes and fees, it was more like the early 90s.

It takes a while for attitudes to shift. Despite the bubble popping, lots of people still believe that their 401k is going to grow at 7-10% per year. That's not necessarily true anymore.

America's economic fundamentals are troubling. We actually spend 5% more than we make. With no domestic savings to fund future growth (or even service our existing debts), we're dependent on foreign investors. And the foreign investors are getting very nervous as the dollar continues to slide.

Re:Real Estate Bubble - Stock Bubble

[ZoneGray]

We had a real estate crash in 1991 and it sucked, even if you didn't own real estate.

Don't hold your breath waiting for housing prices to drop more than a couple percent, anyway. And even then, mortgage rates would be high, so it would be difficult to take advantage.

The key to success in real estate is simple: Buy Young.

Buy a house as soon as you can manage it, put down as little as you can, get as big a mortgage as your paycheck can handle, and buy in the nicest part of town that you can afford. It can be a financial load at first, but as the years go by, it gets easier and easier; your mortgage payments are fixed as your income increases (even if you just make inflationary raises, after 20 years those mortgage payments become relatively small). And the mortgage interest deduction is one of the great ripoffs of all time, you might as well take advantage of it.

I didn't buy young, to my eternal regret. I remember 20 years ago thinking, "$50,000? I could never pay that off." But if I had bought, I'd be living in a $400K house paying about $250/month for a mortgage.

Re:Real Estate Bubble - Stock Bubble

[badasscat]

Much the same way as there's a certain intrinsic value in real estate. You need to remember that part of real estate is all about location, which is not intrinsic.

Uh, last I checked, you buy a property in Manhattan, whatever happens to the real estate market, your property is still in Manhattan.

Location is intrinsic. The value of that location is not intrinsic, but that value itself is linked to intrinsic, er, properties (for lack of a better word). For example, New York was built where it is because it is on top of one of the greatest natural harbors in the world. That is never going to change, so the value of a particular property in New York will likely not fluctuate all that wildly - it does have a certain intrinsic value based on physical properties of the location that will never be altered.

Beyond that, I just don't think there is any comparison between real estate and stocks. When you buy a stock you are buying a piece of paper - you're no longer even buying the promise of dividends (which is why people used to buy stock), because most technology companies have chosen to forego dividends and instead reinvest that money into company growth. The unspoken expectation between company and investor is that eventually there will be a dividend payout and all that investing will have counted for something, but this expectation was sort of turned on its ear during the dot-com bubble and people started investing instead with nothing but the expectation that the stock would go up. They had no idea why they were actually doing it; it was not based on anything.

Then we had the crash, which knocked some sense back into these people. Those who argued that you buy stock based on company fundamentals and not speculation were vindicated. Something similar could happen in real estate, but never on that scale because after all, when you buy real estate you are buying a tangible asset, not a piece of paper that is already priced based on the expected position of the company five, ten, even twenty years in the future.

In both cases, the price you pay is the intrinsic value of the item, plus all of the abstract hard-to-quantify stuff.

This is not at all true. When you buy stock you are not paying for the intrinsic value of anything. You are paying for the expected future intrinsic value of a company, based on its P/E ratio.

To make stocks and real estate equivalent, a seller of a home or a piece of land would have to say to you "this home may only be worth $300,000, but I am going to charge you $2.4 million because that is what I believe it will be worth 20 years from now." Obviously, nobody buys real estate like this, but it is exactly the way people buy stocks. Stocks have a certain level of inherent speculation (even if you're buying "value" stocks, the P/E ratios are rarely less than 8 or so... with tech stocks they're usually more like 60 or 70), whereas real estate is always sold for what it's valued at today.

So the prices of real estate can go up and down, but because there is little speculation involved (unless you're buying undeveloped land in the hope that it will eventually be developed), there is little risk of a sharp downturn. That's as true now as it ever was. I mean, people have been saying for 100 years that real estate is overpriced, but how much do you think an average home built in 1900 costs today compared to what it cost at that time? Real estate prices will only continue to rise over time because there are only so many places to live in this country and a lot more people both being born and moving in every day.

Stock prices are really anybody's guess. They've trended upwards over time just as real estate has, but they've always been subject to severe corrections, bubbles and overall fluctuations than real estate has.

Everyone was guilty of hubris at the time

[filmmaker]

There is a quote in that article by Rob Hersov that describes the way a lot of people felt at that time:

"Those were incredibly heady days," he says. "Fun - absolutely. We thought we were making a difference. We thought we were getting out there, shaking things up, doing something no one had done before. We really were pioneers - buccaneers."

That statement demonstrates the two truths of the dot com explosion: on one had, we really did make a difference - we built a huge IT infrastructure in, essentially, the blink of an eye. On the other hand, that statement is packed with the hubris and exaggerated sense of importance that also permeated the time.

The analogy was often made in 2000/2001 of the Detroit auto industry and the development of the US national highway system. The same thing happened with scores (or maybe it was hundreds?) of companies popping up with the word "motors" in their name during the period. And now there are 3; the big 3 left in Detroit.

Not only that, but barring e-Bay and a few other notables, the companies that made it out of the bubble are ones with unique brand names: Google, Amazon, Travelocity, Yahoo!, and GoDaddy.

I also disagree with the apparent conclusion that there are no lone wolves anymore. The climate is better for a savvy lone wolf than it was even in 1997, I believe.

Who came up with the e-Idea of e-Appending e-E to e-Everything anyway?

Just for fun

[hackstraw]

Read about the California Gold Rush, and mentally timeshift the dates and where appropriate substitute gold oriented things with computers.

The biggest difference between the two is that California was not settled at the time and it was most difficult to get basic necessities. Otherwise, same shit different day. People think they can get something for nothing.

Downhill all the way?

[Zocalo]

I don't know about that; more like finding its proper level again. Take a look at a comparison between the NASDAQ (^IXIC) and the Dow Jones (^DJI) and you'll see what I mean.

A day late...

[Gzip Christ]

No, it was March 10th, 2000 when the NASDAQ peaked. Was this story submitted yesterday and the editors didn't bother to update the reference to the anniversary being today? The anniversary was yesterday.

Isn't Over Yet

[mslinux]

Home prices have yet to crash. Everyone keeps talking about how we had a 'soft landing'... it was soft because of low interest rates that have allowed people who really can't afford housing to get into the game. Wait until the housing bubble pops. Then, we'll get what we should have got when techs crashed... it's gonna be painful, real painful. All one needs to do is read a bit of history to understand how insane real estate prices in America have become. American debt is at an all-time high. We owe way too much money. Home prices have been going up by 20 and 30% annually in many areas... pay checks haven't... is it just me, or do others find this odd?

Wrong.

[brunes69]

A mortgage is basically the best 'debt' you will ever have in your life. It is not like other debt because of two simple facts:

- It is remarkably low interest (below prime rate right now with many banks)

- The interest itself is tax-deductable, at least in the US.

On top of this, the alternative - paying rent - is markedly worse. You are basically flushing money down the toilet, with a 0% return.

The parent was indeed giving good advice. Your advice, however, is not prudent. Every year you delay getting a mortgage, is a full year of rent you could have been using to pay down one. Even if the interest rate on the mortgage was 15% or 20% (which it isn't), and even if there was no tax deduction (which there is), it would still be in your interest to get a mortgage.