I spent this past weekend sitting on my porch enjoying rare afternoons of nice weather and warm sunshine.

My neighbor Bill clearly had the same idea, as he was also on his porch–reclined in his old Lazy Boy (not an outdoor piece of furniture), chain smoking his Marlboro Reds, and sucking the air out of some Natty Boh cans.

But, such is the life of a “Baltimoron.” (This is a term of endearment, I promise.)

Bill and I got to talking, and he shared his dream of ‘movin’ deownde’ ocean, hon,” once he sells his home and relocates to a beachside condo.

Bill is incredibly excited about this future, especially because housing prices in our small Baltimore burb have exploded in recent years, and he’ll be making a killing…or so he thinks.

Our area of the city has undergone major gentrification in the last decade, thanks to hip restaurants, artisanal boutiques, and swanky lofts retrofitted into once-operational mills.

This is great for the local economy, but detrimental to the blue collar households who once worked in those mills, and now can’t afford that $19 garden salad served in a mason jar.

There’s two sides to this coin though, because thanks to those shops and other development, the average listing for a small row home like Bill’s tops out around $275,000.

Again, this is great for Bill. He purchased his home 12 years ago for ~$52,000.

However, it doesn’t take a real estate expert or an economics professor to tell you that there is blatant overvaluation happening here.

The overvaluation trend is taking place all across our country. Unfortunately for the larger housing market, it seems like Baltimore is actually one of the least troubled metro areas in terms of overvalued homes.

(Believe me–I’m fully aware of the city’s large collection of other problems.)

According to Fitch Ratings, there are a handful of areas where housing prices are reaching even more alarming levels.

“In some cities, housing stock is overvalued by as much as 23%, based on fundamentals such as consumer incomes, population numbers, mortgage rates, and rents.” -Fortune

San Francisco is currently overvalued by 16%.

Reno, Nevada? 23% overvaluation.

Bend, Oregon and Austin, Texas homes both linger at 20%, and these are just a few examples.

Most experts agree that 20% overvaluation is the threshold for concern, and in many areas, that is already the norm.

Current conditions aren’t quite where they were in 2008, right before the bubble burst–but that’s not a reason to ignore the signs.

I would just like to remind everyone of the commonly accepted definition of insanity: doing the same thing over and over and expecting different results.

Blast From the Past

Let’s look at the two most recent market corrections, and try to do some historical sleuthing:

Back in 2008, housing prices were overheating at incredible rates, as was the entire stock market.

This chart illustrates the ratio between total US Market Capitalization of all shares outstanding and GDP, the historical average of which is 50%.

A 100% ratio means that the total market cap is equal to the nation’s GDP. In this case, the stock market would be considered fairly valued. An undervalued stock market would produce a ratio less than 100%, and therefore the opposite for an overvalued market. A good rule of thumb?

Tread lightly whenever the ratio exceeds 100%. It’s a good sign that the market is overdue for a correction.

Take note of two things here. You probably can’t miss them, because there are two large red arrows pointing in their direction.

The first is the dot-com bubble of 2000. The second is in 2008, the housing bubble.

Between 1996 and 2000, dot-com companies saw their stock prices soar. the NASDAQ exploded from 600 to 5,000 points. In 2000, the market cap to GDP ratio reached 146%, an all-time high. Poorly managed companies with no hope or history of earning profits had market capitalizations of more than a billion dollars. (Anyone remember Pets.com?) In the end, a total of almost $8 trillion of wealth was lost.

In 2008, the ratio reached 108%. This bubble came suddenly, as a combination of stock overvaluation and the collapse of the housing market. In just five months, the DOW fell 20%, from historic highs of 14,000 to just over 7,000.

I don’t want to bring back nightmares for anybody, but the series of events that followed nearly pushed our entire global economy off a cliff.

Right before both of these bubbles burst, stocks were clearly overvalued.

In fact, right before essentially every market correction, the US market cap to GDP ratio has been over 100%.

Today, the ratio is 127%. You make the connection.

Share valuations right now are sitting at multi-year highs, and we shouldn’t be foolish to ignore history.

But wait, there’s more!

In 2016, we’re not only struggling with overvalued housing prices. There is another troubling form of credit plaguing our economy. You might be able to figure it out:

I’ll give you some hints:

• This form of debt ballooned from a total of $253 billion in 2003, to $1.2 trillion today. (That’s over 70%.)
• 43 million people in the United States are tied to this type of loan.
• This is the only type of consumer debt that is not decreasing, but increasing.
• The average borrowed amount of this type of debt is $35,500.
• 7 million borrowers are in default of these loans.

The answer? Student Loans.

Historically, the next financial step for individuals who recently graduated college would be the purchase of a home.

Now, recent grads can barely stay afloat, as their monstrous education loans drag them down. Most students will be 40 years old before their loans are paid off.

Studies show that because of their looming debt, the majority of recent grads are spending less money, especially on large purchases that stimulate our economy. Even if they wanted to purchase a home, their large debt and insufficient income makes it difficult to qualify.

One housing analyst gives this example of the San Francisco Bay Area:

“…the average home price is $1.45 million and the average income is $180,000 per year. Given a person’s typical homeowner insurance costs, credit card and car debts, he argues the average person who is simply buying a home for shelter, rather than speculation, can afford just a $778,000 home, nearly 50% below the average priced $1.45 million home.”

The impact of this debt is spreading beyond individual graduates. It’s dragging down the entire economy and slowing down the recovery of the housing market.

We in the economic community can draw a number of parallels between past corrections.

Back in 2008, we should have seen it. Looking back, we should have known the bubble was coming.

Some people did. John Paulson saw it, traded against it, and made $20 billion in what people now call “The Greatest Trade Ever.”

Unless you were John Paulson in 2008, that bubble flew under your radar. Millions of families, maybe even your own, suffered because of it. More than $6 trillion in household wealth was destroyed.

Now I’ve got some good news, and some bad news.

Bad news first. You’re not John Paulson, so those bubbles and market corrections probably had a negative effect on your financial portfolio in the past.

Good news next. Market corrections and events like the 2008 housing bubble aren’t completely unforeseeable, and you don’t need to be John Paulson to figure it out.

The only guarantee we have is that another bubble will be bursting in the future.

There are no ‘ifs’ on this. What we need to figure out is when.