The Greater Fool Theory

The real estate market was and still is driven by the greater fool theory; out there - somewhere - is someone even more stupid that will be happy to catch the proverbial falling knife.

The folks behind the triple whammy (deregulation, cheap *and* easy credit, and the marketing mania) are now delivering the final punch: the threat of inflation that will kill your cash and double the cost of rentals. That’s how the real estate market will be saved or at least find a bottom… Buy, buy, buy - happy real estate days are here again! Right, back to the greater fool again…

Folks, sorry to burst another bubble (no pun intended) but inflation is years away. As long as we have growing unemployment, increased savings rate and subzero growth there will be only deflation. Cash is the new king (maybe not the dollar) as everything else will loose in value.

John Galt explains the magic of deflation and inflation so well in this article. Here is another analysis of the housing market by T2 Partners. I’d add that the real estate market will not find a bottom until 2014-2015 as per Steve Barry’s forecast (see image below) and there will be no bounce.