Bubble Trouble

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"Bubble Trouble"

Paul Krugman has a graph of price-rent ratios normalized so that the 2000 level is defined as 100:

bubblestages.png

One interesting thing about this is that you could have been looking at this data in May 2002 and decided that Las Vegas real estate was overvalued. And I think someone who thought that will be vindicated over time. But at the same time, you could have looked at this data in May 2002, bought property in Las Vegas, and sold it five years later for a healthy profit. You could even have waited for the Las Vegas market to be clearly on the downswing and still made plenty of money. Which is part of the general problem with bubble psychology — the mere fact that a bubble is under way doesn’t necessarily make it irrational to hop on the bandwagon.

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