What Telephones Can Teach Us

There are only so many people in the United States. Yes, there are a lot of them, but only so many of them. Three Hundred Twenty million or so. And only a percentage of them will use telephones. Yes, a large percentage, but only a percentage. And only a pecentage will have multiple phones. Again, a rather large percentage, but only a percentage.

So in the heyday of the bling telecom boom, what were people thinking? In the end, only so many phones could be sold. A limit would have to be reached, and what then?

Now another famed pair of telecoms have decided to merge. Of course. Mergers are the only way to expand the business with new customers. Because there are only so many people, and as a result, only so many phone customers to be had.

Now, let's look at real estate. Unlike phones, there is a limited supply of real estate. And people must sell and buy when getting a new job or a new family. And buying a home is the biggest purchase of most people's lives, which distinguishes it from telephones. The demand in the real estate market beyond normal levels of home ownership has been supported by 'investors' buying second homes as 'investments.' It is a speculative supporting of the real estate market. Hence, the term 'bubble.' This situation is both a demand and supply issue.

The Economist had an excellent article explaining how this works. My dear old Dad pointed it out to me. To paraphrase, the steep increase in prices of homes has to also do with the
shortage of supply. That limited supply causes bidding to escalate higher and more quickly. When the real estate bubble pops, the speculative ownership, i.e. 'investors', will not be able to afford the second overpriced mortgage. So there will be a sharp increase in the supply which
will accelerate the buyer's advantage in home buying. So the prices will experience downward pressure.

The focus is always on demand in the articles you see, especially on CNN Money, the bane of my existence and why I started this blog. Of course demand is important, but it is one half of the equation. The other half is supply. And if the supply increases sharply while the demand stays the same, that will have a downward pressure on the prices of homes.

So the question becomes: what would kick the pissant 'investors' out of the market? The first to fall would be the flexible interest rate types because the rental market will not support the mortgage payment for the rental property. Seriously, I don't think all 'real estate investors' would be that stupid. But there is a good number of them, enough to kick it off. The bubble being popped, I mean.

They would be the first kick to the tires. Let's focus on what would trigger that.
1 - Higher interest rates coupled with continued low rental rates for the
market,
2 - Sudden, and unprepared for, unemployment or medical expenses, coupled
with low rental rates,
3 - Big drop in the value of the dollar in a relatively short period of
time, say, six months, (that would lower the standard of living considerably
and make living expenses very high, making a second mortgage much less
possible to afford),
4 - Third world nations deciding to put their cash in other currencies
besides the dollar, and our markets finally noticing that, since they aren't
now.
I have written a lot to digest right now. Let's blame it on the sugar.

Econo-Girl