Is it really different this time?

But the team proceeds to build an outstanding case for explaining the reasons that we see the conditions we see and what it means for future investment planning. In my view, the forces described are not different at all, but merely a next step in the continually shifting opportunities in a crazy global economy.

Part of my attraction to their arguments, I must admit, is that the authors and I share a deeply held optimism in capitalism and human ingenuity. So global-econ bears beware, you'll probably hate this book. You'll be seething by page 6.

Beyond the orientation appeal, the book does an outstanding job of describing actual forces (which few will deny, regardless of their bullish/bearish sentiment of the implications). Specifically:

1. The post-industrial (service or knowledge) economy has given rise to fluid,
"platform" companies which retain only the highest value-add components of the business (design and selling). They outsource the capital-intensive functions like manufacturing. Think Cisco and Dell. For that matter think everyone in Silicon Valley, but also Ikea.

2. Political/economic/social structural realities of China (and other Asian countries) dictate that, for the foreseeable future, the manufacturing companies (the outsourcees for the platform companies) will be locked in a market share race with one another that results in deflationary pressures and better profits for the platform company.

I won't discuss here the merits of their arguments about the "quality of jobs" or sustainability of the trade deficit, or why the US economy hasn't noticed the oil-price spike. Suffice to say that the implications and benefits weave into a compelling argument.

Rather let's get right to over simplifying the implications for the real estate market (Chapter 8):

1. When an economy orients around platform companies, that economy becomes less volatile. This happens because the nature of manufacturing requires inefficient inventory build up. Platform companies remove
those inefficiencies from their books and therefore get hit less hard when the economy turns. Ultimately this means more income certainty for employees, which translates into a greater capacity for mortgages. It also translates into increasing consumer disposable income which often goes into buying more home. (that is, home prices are up along with the size and quality of the homes.)

2. The deflationary pressures driven by the outsourcees has kept inflation almost entirely off the radar. That plus capital inflows have conspired to keep long-term interest (and mortgage) rates low. When graphed against the costs of mortgages, home prices have adjusted exactly as they should have.

Chart adapted from Our Brave New World, GaveKal Research. Bond price and Median home price indexed to 100 ten years ago. Interest rates of course are inversely related to the bond price. I include this chart because the blogoshpere is full of charts illustrating the bubble.
Here's a lone contrarian opinion.

The chart illustrates that "home prices have adjusted for the decline in long rates, but nothing more."

The book rests its analysis on the platform company. All the conclusions are extensions of that concept. Ultimately, the question of real estate bubble rests on whether you consider the platform company economy to be a fundamental change ("it's different this time") and therefore we're 10-years into a "deflationary boom" that may last for decades more. Or if you think these companies are nonsense and we'll shortly return to volatile boom-and-bust cycles of the industrial age.

GaveKal argue vehemently against the notion of a real estate bubble. Does this mean they, as investment advisors, are telling their clients to buy real estate? Well, no. It seems they view the massive real estate growth as largely played out. So their recommendation is 'don't panic' but put your money into platform companies.