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Pop Goes The Market: An Analysis Of The Current Real Estate Industry As Seen Through The Patterns of

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Title: Pop Goes The Market: An Analysis Of The Current Real Estate Industry As Seen Through The Patterns of


1
Pop Goes The Market An Analysis Of The Current
Real Estate Industry As Seen Through The Patterns
of Past BubblesLaura D. KornhauserProf. Carmona
2
Project Goals
  • Identify and Classify Bubble Behavior
  • Quantitative
  • Psychological
  • Is the Current Housing Market Experiencing a
    Bubble?

3
Outline
  • What is a Bubble?
  • Bubbles of the Past
  • The Internet Bubble
  • The Housing Bubble

4
What is a Bubble?
  • Definition - A period during which the price of
    an asset suddenly soars for irrational reasons
    and then collapses

5
What is a Bubble?
  • Relation to Efficient Market Theory

6
Assumptions
  • Violation of Efficient Market Theory

7
Outline
  • What is a Bubble?
  • Bubbles of the Past

8
Bubbles of the Past
  • Tulipomania
  • South Sea Bubble
  • Mississippi Bubble
  • Crash of 1929

9
Outline
  • What is a Bubble?
  • Bubbles of the Past
  • The Internet Bubble

10
The Internet Bubble
  • New Economy
  • March 2000
  • Over 375 Internet Companies Public
  • Total Market Capitalization of 1.5 trillion
  • The Crash
  • 60 Decline in Market Capitalization

11
Problems of The New Economy
  • Short Supply of Stock
  • High Demand (Over Exuberance)
  • The Underlying Companies
  • Lack of Experience
  • Lack of Historical Framework
  • Venture Capitalists
  • Momentum Investors

12
Internet Bubble Analysis
  • Companies Analyzed
  • Dynamics of Internet Bubble Stock Prices
  • Price to Earnings Analysis

13
The Indexes
14
Companies Analzyed
  • AOL
  • Amazon.com
  • Yahoo!
  • Priceline.com
  • eBay

15
Dynamics of Internet Bubble Stock Prices
16
Dynamics of Internet Bubble Stock Prices
17
Price to Earnings Analysis
  • Case 1
  • Stock Price 50
  • Earnings Per Share 5
  • P/E Ratio 10

18
Price to Earnings Analysis
  • Case 2
  • Stock Price 50
  • Earnings Per Share 1
  • P/E Ratio 50

19
Price to Earnings Analysis
  • Case 3
  • Stock Price 50
  • Earnings Per Share -10
  • P/E Ratio -10

20
Price to Earnings Analysis
  • Case 4
  • Stock Price 50
  • Earnings Per Share -1
  • P/E Ratio -50

21
Price to Earnings Analysis
  • Conclusions
  • Positive P/E Ratio
  • Larger Magnitude -gt More Overvalued
  • Negative P/E Ratio
  • Smaller Magnitude -gt More Overvalued

22
Price to Earnings Analysis(Amazon.com and Toyota)
23
Price to Earnings Analysis(AOL and Yahoo!)
24
Outline
  • What is a Bubble?
  • Bubbles of the Past
  • The Internet Bubble
  • The Housing Bubble

25
Can a Housing Bubble Exist?
26
Nature of Housing Bubbles
  • Local

27
Past Housing Bubbles
  • 1929 Florida Real Estate Craze
  • 1979-1984 Houston Housing Bubble
  • 1987-1991 Los Angeles Housing Bubble

28
Florida Real Estate Craze
  • American Prosperity Post WW1
  • Growing Florida Population

29
Houston Housing Bubble
  • 1980-1982 Population Growth of 12
  • 1986 Unemployment of 10.2
  • Prices Returned to Peak Values 9 Years Later

30
Los Angeles Housing Bubble
  • 1987-1991 Rate of Price Increase Trippled

31
Assumptions
  • Violation of Efficient Market Theory
  • A Housing Bubble Can Indeed Occur At the Local
    Level

32
The Housing Bubble
  • Cities Analyzed
  • Bubble Cities
  • Boston
  • Miami
  • New York City
  • San Diego
  • San Francisco
  • Non Bubble Cities
  • Philadelphia
  • Indianapolis

33
The Housing Bubble
  • Home Prices

34
The Housing Bubble
  • Home Price Appreciation Since 2001
  • Mortgage Rates

35
The Housing Bubble
  • Data Analysis
  • Price to Rent Ratio
  • Mortgage Payment to Income Ratio
  • Income Multiple

36
Price to Rent Ratio
37
Price to Rent Ratio (Houston)
38
Price to Rent Ratio
  • T-Test Analysis
  • Increase/Decrease in Ratio Value
  • August 1998 and September 2002

39
T-Test Analysis Results
  • Boston
  • P-Value 0.9897
  • LA Data April 1986 and May 1990
  • San Francisco
  • P-Value 0.9508
  • LA Data December 1988 and January 1993

40
T-Test Analysis Results
41
Mortgage Payment to Income Ratio
42
Mortgage Payment to Income Ratio
43
Income Multiple
44
Income Multiple
45
What Will Burst The Bubbles?
  • Increased Unemployment
  • Increased Mortgage Rates
  • Changes in Consumer Confidence

46
End
47
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48
AOL
  • Founded in 1985
  • Merger between AOL and Time Warner approved in
    December of 2000, the

49
Yahoo!
  • Founded in 1994

50
eBay
  • Founded in September of 1995

51
Amazon.com
  • Amazon.com began in 1995

52
Priceline.com
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