Should You Worry About Stock Market and Housing Bubbles?

Stock market bubbles….basically no. Just save more for the long-run. But housing market run-ups are another matter….

I don’t believe ordinary investors should spend much time wondering if the stock market is overvalued. I’m more cautious when it comes to housing, because a fall in your local housing market can do you greater and more immediate harm.

The money you put down on your house is different from the money you put down on an index fund for your retirement. Your house is the most leveraged, illiquid, and undiversified investment you will ever make. So a 10 to 20 percent swing in your local housing market can have an outsize impact on your wealth.

Housing runups and bubbles are distinctive risks for a second reason, too. Most people don’t need to draw on much of their stock portfolio until they’re at or near retirement. Even then, people draw down their wealth gradually in their 70s, 80s, and hopefully beyond.

In contrast, buying a house is an all-or-nothing proposition. And depending on what happens in your life, you might need to sell unexpectedly. You or your partner might lose a job. You might have a child or get a divorce. You might have to move to a new city to find work. If the local housing market drops just as you need to sell your house, that can be financially devastating.

How vulnerable you are depends a lot on your own life situation. If you’re confident you’ll be able to stay in the same house for a decade or more, you can ride out a bursting housing bubble in the same way you can ride out a bursting stock bubble. You’re less vulnerable if you are a tenured professor than if you work in a more volatile profession. Employment is not the only variable in play, either. If your marriage is troubled, that’s harder to talk about, but it also increases the risk that a separation will force you to sell earlier than you expected.

At least that’s my short answer. More here, at Vox.

[Cross-posted at The Reality-Based Community]

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Harold Pollack

Harold Pollack is the Helen Ross Professor at the School of Social Service Administration at the University of Chicago.