Nasdaq bubble shifts to real estate

WSJ: In market experiments conducted by George Mason University professor Vernon Smith, who shared in the 2002 Nobel Prize for economics, participants trade a dividend paying "stock" with a very clear fundamental value. A bubble invariably forms, and then bursts. If the experiment is repeated with the same people, a bubble forms again. The second time, though, participants think they will be able to sell their positions before trouble strikes. Participants express surprise that they weren't able to get out before the second collapse.

In the wake of the Nasdaq collapse, this echo-bubble phenomenon doesn't seem to have occurred in quite the same way as in the lab. Unlike Mr. Smith's experiments, where there is only one thing to trade in, the world offers investors myriad choices.

The zaniness that characterized 1999 and the early months of 2000, when shares of untested companies built on blue-sky expectations could skip 30% higher on the slightest scrap of news, for the most part doesn't exist any longer, says Doug Kass of the hedge fund Seabreeze Partners. He believes much of the mania has shifted into real estate.

Along with big price jumps in many housing markets, 23% of U.S. home sales last year stemmed from investment purchases, according to the National Association of Realtors. For his part, Mr. Kass says people he knew from near his Palm Beach, Fla., home who were day trading stocks back in 2000 are now all real-estate brokers.

"We have day trading in homes instead of day trading in stocks," he says. "It will end the same way, and it will be the same guys delivering the product."

Yale University economist Robert Shiller, who like Mr. Kass had a negative view on the U.S. stock market in 2000, also says the real-estate market is where the speculation is. While his survey work shows that investors still have a positive view of stocks, he believes that view reflects more grudging optimism than glee.