Speculative bubbles end with a painful pop.
The dot.com mania eventually ended with the tech wreck. Quick-buck speculators who drove the market to unrealistic prices ran from the market when prices started to fall, further driving down prices and leading to a market crash. The speculators crashed and burned, but those with well-diversified portfolios have fared well since then.
The housing bubble was next. Dangerously low interest rates held down by Alan Greenspan's Fed policies made money cheap and easy to get, allowing millions of inexperienced people to speculate in rental houses. A 10-minute phone call with your local bank got you a $250,000 line of credit. When prices started to soar, people who were soured on the tech wreck threw money at real estate as the new way to get rich, further driving up prices. The housing market is still trying to find its way back to equilibrium.
What's the next speculative bubble? Will it be gold, copper or other commodities? Will it be China? Or will it be Treasury Bills?
Farmland, according to Robert Shiller. Good old dirt.
Even as the most prolific bubble-spotter, Shiller admits that bubbles are hard to predict. He called both the dot.com boom and the real estate bubble just before they peaked, yet he still humbly admits that forecasting bubbles is hard work. But as professor of economics at Yale University he's proven that he knows what he's talking about.
According to Shiller's research farmland prices peaked in 2008, up 74% since 1999. And that's after adjusting for about 28% inflation! While housing prices were still down 37% in 2010, farmland has recovered much quicker, only down 5%.
A recent story highlighted in a podcast by the BBC provides a perfect example of how high farmland prices are. Scott has lived and farmed in Kansas his whole life. Six years ago he bought a 150 acre farm at $800/acre. He tried to improve the soil with fertilizers and lime to increase the wheat yield. Despite his expertise honed through decades of farming experience he wasn't able to increase the yield to make it profitable, so he dumped the land. How much did he have to dump the land for? $1,350 an acre - a whopping 69% profit for selling unusable dirt.
What makes bubbles particularly dangerous and painful is that they pop quickly. Non-liquid assets such as land and buildings take a long time to sell, and even longer when everyone else is bailing out. Given Shiller's track record, now is probably a better time to sell farmland than it is to buy.