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David D. Kirkpatrick and Jamie Heller

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from: David Kirkpatrick

Bubble-iscious

Posted Tuesday, May 23, 2000, at 12:11 PM ET

Jamie--

Funny you should mention real estate. Last summer, the rent on my tiny, cavelike studio in Little Italy jumped from $800 to $1,200 a month. So I moved to Brooklyn, paying $1,100 a month for a one-bedroom, which I thought was a safe, market rent. Last Friday, my landlord surprised me with a notice that he is raising it to $1,550 in July. So it looks like gypsy Dave will be packing up his tent again and moving on for greener pastures ... Queens, perhaps?

At any rate, this reporter's anecdotal evidence strongly suggests that the New York City real-estate market is all too hot. You are on to a really compelling issue, though, because unlike the stock market, the housing market really hits every American (forgive me) where they live. I am not nearly genius enough to figure out how fast the economy is growing/slowing and what effect that has on real-estate prices. But since this seems to be a convention of this format, I am willing to talk about the question anyway.

In the late 1980s, there was a real-estate bubble, fueled in part by tax laws that encouraged unprofitable development projects and in part by loans from savings and loans. When that bubble burst, it exacerbated the country's recession.

Nobody thinks there is a real-estate bubble today, for a lot of complicated reasons--lenders are still reeling from mistakes the last time around, a lot more of the real-estate market is funded by the stock and bond markets, which tend to react quickly to signs of trouble. Maybe even too quickly sometimes.

This time the doomsday scenario, as we all know, is that there is a bubble in the stock market, and when it bursts the resulting loss of wealth will make us all feel poor, lead to layoffs, and send us into a recession.

My own view is that this is a much bigger problem in NYC than that it is anywhere else. In New York, real-estate prices swing much more wildly than elsewhere in the country--routinely doubling in booms and falling by half during downturns, especially in wealthy or peripheral neighborhoods.

Here is the real catch: The New York economy is more dominated more than ever by the notoriously volatile Wall Street firms. In 1987, the 4 percent of New Yorkers who worked on Wall Street accounted for 11 percent of the income paid in the city; in 1998, the roughly 5 percent of New Yorkers who work on Wall Street took home 19 percent of the money earned in the city. A downturn in stock trading or underwriting business (both correlate closely with the Nasdaq) would seriously hurt the securities business. Bonus cuts, maybe even pink slips. And that would send a chill through the whole local economy--especially the real estate market. We saw what happened to the stock market in 1987 and then the New York real-estate market in 1989 (before the rest of the country slid into recession). Next time around, it could be much worse. (I am getting my numbers from a recent study by the Federal Reserve Bank of New York--economists Jason Bram and James Orr.)

Sound like wishful thinking? It certainly is. How else am I going to be able to afford an apartment around here? But that doesn't mean I'm wrong.

By the way, right you are about the slippery slope between Goldman, Sachs and Tokyo Joe--it is not like the mainstream investment firms are so lily-white about promoting stocks to investors in order to enrich themselves.

And that lead us to ... James Cramer. I have to say, I find Fox's reaction to his comments about the value of TheStreet.com's stock a little silly. That is what he does: He's a money manager who talks about what stocks he is buying. I think he recently commented in New York magazine that TheStreet.com stock was trading at just about the value of the cash on its books. That's a tout of sorts. Big deal. It isn't like he hasn't disclosed his relationship with TheStreet.com.

Let me know if you hear of anyone moving out of an apartment.

David

the breakfast table
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from: David Kirkpatrick

Bubble-iscious

Posted Tuesday, May 23, 2000, at 12:11 PM ET
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David D. Kirkpatrick is a contributing editor at New York magazine who writes frequently about business and finance. Jamie Heller is editor for strategic ventures at TheStreet.com, where she's worked since its 1996 founding.
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Reader Response from The Fray--to be read after the most recent entry:


I still don't understand how the stock market can be efficient in the long term and not the short run. And I'm not relying merely on Keynes' famous sentiments about the long run; my point is even simpler: when is the long run? Was Microsoft's long run value from 1990 to early 2000 or to today? Short run volatility must have consequences for people who claim long run efficiency. To my mind, and for many other reasons, believing in efficient markets is like believing in Santa Claus--there are correlations between expected results and reality, but people really ought to grow up and accept that no-one on Wall Street knows anything.

--Jeff

(To reply, click here.)

(5/22)

To Jeff: Various natural processes are long-term efficient without being short-term efficient, for example the downhill flow of water or the process of natural selection (aka evolution). Complex human processes seem to have similar behavior. Perhaps efficient is being confused with "optimal". The problem with most strategies that attempt to be optimal is that they often have truly horrendous failure cases, which wipe out all their interim or theoretical gains. Democracy has been called "the worst form of government, except for all the rest." It is hardly optimal, and in many cases very inefficient. A dictator could get the graffiti cleaned up and the trains running on time; democracy seems to have a hard time doing such things. But what about the failure case of a less-than-benign dictator or a dictator whose benign intentions diverge from many or most of the desires of the population? An example of short-term efficiency vs. long-term, in terms of human happiness.

That's not to say short-term efficiency is bad, or that we can't improve on raw systems. But it is possible for a strategy to be the best long-term one without exhibiting short-term efficiency.

--Paul Canniff

(To reply, click here.)

(5/23)

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