Housing Bubble At End of Binge

San Diego — Remember the Alamo? Remember the Maine? Forget both. Remember March of 2000 if you're concerned about your economic future. That month has meaning for today. It's when the stock market bubble of the 1990s peaked and began to crash.

San Diego was hit harder than other cities because it has so many tech, telecom, and biotech stocks that were flying so high at the time. Almost six years later, most haven't come close to recovering.

But here we are, fretting that another bubble will burst: housing. It's like the drunk who goes off on a second bender before he has recovered from the first. If the housing bubble bursts, San Diego could wind up with two hangovers at the same time.

Actually, the housing bubble was created as a cure for the hangover from the bursting of the 1990s stock market bubble, although Federal Reserve chairman Alan Greenspan would never admit it. On December 5, 1996, Greenspan described the stock market investment climate with these words: "irrational exuberance." Stock markets around the world plummeted -- temporarily. Greenspan caught flak from Wall Street moguls and the politicians who pander to them. Instead of doing something about the bubble, he continued to feed it by pumping money and credit through the banking system and waxing poetic over the solid performance of productivity, or output per worker hour. Stocks bounced back quickly and zoomed the rest of the decade.

But then came March of 2000. Stocks tanked. The next year brought 9/11. Down some more. The Fed then created a flood of easy money, driving interest rates to very low levels. As mortgage interest rates plunged, people bought and built houses and borrowed against the soaring equity in their homes, just as Greenspan had intended. He knew he had to create another bubble to keep consumption rolling.

Again in San Diego, the housing bubble, like the earlier stock market bubble, was one of the nation's worst; the percentage of households able to buy median-priced homes sank to 10.

Then the Fed began pushing interest rates back up. The housing bubble is leaking a bit but not yet bursting.

Some think that if the housing bubble pops, money will flow back into stocks. That's plausible: stocks aren't cheap by historical standards but are less overpriced than bonds and real estate. Bud Leedom, publisher of San Diego-based CaliforniaStocks.com and California Stock Report, is bullish on stocks, but "I don't think there will be another bubble. Investors are too jaded, although there will be hot periods periodically."

The San Diego stocks listed in the sidebar demonstrate just how far local stocks have fallen from their 2000 peaks. The list, taken primarily from Morningstar, Inc., and spot-checked against other sources, shows the 2000 peak price followed by the approximate price in recent sessions. All prices are adjusted for stock splits -- that is, the 2000 and current prices are comparable. It doesn't include onetime highfliers such as Peregrine and Leap Wireless, which rocketed upward and wound up in bankruptcy, or Gateway, which soared, crashed, and moved up the road to Irvine; or successful companies (such as biotech Idec) that sold out for a good price.

If you've looked over these lists of many losers and a few winners, you note that financial stocks such as banks and real estate investment trusts have done well since 2000. With interest rates now on the rise, Leedom believes such stocks won't do so well, and the long-sagging techs and biotechs should finally make an upward move. He remembers when they moved only downward.

Back in the 1990s, Leedom had a publication exclusively devoted to local stocks, San Diego Stock Report. Each month he computed an index of the average San Diego stock price. It flew upward and upward. "The two main sectors were techs and biotechs," he recalls. As the year 2000 staggered on, the index plummeted. "At one point the index was down 70 percent," he says. His subscriptions dropped as people soured on the market, and eventually he jettisoned the whole business and became a securities analyst and investment banker.

Just recently, he went back into the publication business with Californiastocks.com and California Stock Report. He has special sections on San Diego, Los Angeles, Bay Area, and Silicon Valley stocks. Once again, he has a San Diego index, but it doesn't correlate with the old one. If he were still calculating that original one, "it would still be down 30 or 40 percent today," he estimates.

There's an old Wall Street adage, "Buy cheap and sell dear." Translation: buy low and sell high. But in the giddy 1990s, Wall Street's advice was to buy high and sell higher. It's called the Greater Fool Theory. You know you're paying too much, but you hope some other sucker will pay even more.

The fools' party ended in March of 2000.

For several years now, San Diego real estate brokers have told buyers to purchase high with the expectation of selling higher. The game will end when there are no greater fools, as happened with the stock market.