Was the Housing Boom an Anomaly?

We were on a land tour this week and a limited partner of one of our clients (think hedge fund type) asked whether the housing boom might have been an anomaly that we can’t expect to be repeated.  It was a great question.  Our client pointed out to the questioner that the same anomaly had manifested 20 years earlier in the mid 80’s, so if it was an anomaly, it was one that tended to reappear in the housing market.

The questioner’s primary point in asking the question was to point out that we may be nearing the end of a 30 year run in low interest rates, and that the housing market might undergo some permanent structural change due to a difference in the financing atmosphere.

I understand where the questioner is coming from, but I think it ignores the potential for bubbles to form in asset classes, and to do it regardless of any kind of financing atmosphere that we can foresee.  Or, to put it another way, the supply/demand swings in markets tend to motivate the placement of capital on their own.

Today it might look like we’re going to have a responsible atmosphere in housing for the foreseeable future.  But what happens when supply gets a little low, prices move up as a result of that, banks begin lending as a reaction to what they see as a very low risk proposition, and BOOM – we’re right back in it.

I agree that the housing boom might have been an anomaly.  But I also think that real estate markets swing from extreme to extreme as supply and demand imbalances change.  So maybe real estate markets don’t know what normal is.

Basically, I just don’t have faith in our continuing ability to act rationally.