Intelligent discourse on the housing bubble (previously on Facebook)
May 8, 2009
Anthony Migyanka shiller called a housing bottom in 2010? how is that different from using the ‘gtm’?
2:07pm · Comment · Like · See Wall-to-Wall
Housing doubled because it was a bubble. Until prices revert back to 2000 levels or lower we are in trouble. That’s what created this horror.
tell shiller as long as people can pay their mortgages and want to, who cares what the prices are? prices are never going back to 2000 levels. even if they drop further (which they will), investors and REITs will swoop in. once excess inventory is taken out of the market, whatever that day’s market price is will be the floor, and we’re off to the races again.
the ‘gtm’ freezes asset prices to the current outstanding mortgage. as long as people pay the mortgage, treasury says that’s what your house is worth. it’s a fair trade.
investors are getting their confidence back and are starting to put capital at risk again. that’s why i doubt a late 2010 bottom. i’m calling it a november 2009 bottom (sooner with a ‘gtm’), barring any other goof ups from treasury (which is still possible).
who knows what commercial real estate is going to do??? treasury and the fed sure don’t.
the ‘gtm’ freezes asset prices to the current outstanding mortgage. as long as people pay the mortgage, treasury says that’s what your house is worth. it’s a fair trade.
investors are getting their confidence back and are starting to put capital at risk again. that’s why i doubt a late 2010 bottom. i’m calling it a november 2009 bottom (sooner with a ‘gtm’), barring any other goof ups from treasury (which is still possible).
who knows what commercial real estate is going to do??? treasury and the fed sure don’t.
‘exotic’ mortgage products were only 7-14% of the market–THOSE ARE MY NUMBERS, YOU HEARD IT HERE FIRST. so even if all 14% go bust, which they won’t, who cares? putting your capital at risk with MBSs, where 14-25% (the rest from non-exotic stuff defaulting from people losing their jobs) is still a heck of a nice return, and the big money knows it. they’re sitting around waiting for more handouts from the fed before they jump in, but they’ve been ready to jump since the FDIC cleaned up IndyMac and put it up for sale. Did you see how many people jumped at it? the line was around the block to get at those assets. and indymac was started by angelo mozillo, the countrywide founder, so you know there was a lot of no-doc loans going on there.
that’s another reason (probably, i’m guessing at geithner, but you don’t have to do any hard thinking to figure out his schemes) geithner is doing nothing. they see excess capacity coming out of the market (teardowns instead of finishing build-outs, don’t doubt treasury had a hand in encouraging that).
Prices got out of line with incomes. It was like every other bubble in history. Peolpe were willing to pay because they bought into the myth of “prices always go up”, “buy now or be priced out forever”, “they aren’t making any more land”(except in Dubai of course). Prices have already fallen to 2003 levels in most bubble markets and we are only in the 3rd inning of this crash. Come on throw the heat.
The US economy will not recover until house prices are allowed to fall to prices buyers can easily pay on a normal salary. The primary evil in the economy is housing “affordability” programs which encourage debt, makiing prices higher, not lower. True affordability is not more debt — true affordability is lower prices. The government’s false affordability programs have created more debt than can ever possibly be repaid. Credit rating agencies lied about the value of this debt, scaring off investors.
When house prices finally fall to affordble levels, and foolish lenders and foolish borrowers are finally allowed to fail, then the economy will work again: there will be investment based on real production instead of on financial speculation, jobs will be created, and money will be earned and spent. Currently, we have no investment because the government is punishing savers and investors with policies that waste their honestly earned money to cover the foolish gambling losses of others.
When house prices finally fall to affordble levels, and foolish lenders and foolish borrowers are finally allowed to fail, then the economy will work again: there will be investment based on real production instead of on financial speculation, jobs will be created, and money will be earned and spent. Currently, we have no investment because the government is punishing savers and investors with policies that waste their honestly earned money to cover the foolish gambling losses of others.
A financial bubble is a temporary situation where asset prices become elevated beyond any realistic fundamental valuations because the general public believes future price increases justifies current pricing. If this belief is widespread enough to cause significant numbers of people to purchase the asset at inflated prices, then prices will continue to rise. This will convince even more people prices will continue to rise facilitating even more buying. Once begun, this reaction is self-sustaining, and the phenomenon is entirely psychological. Once the pool of buyers is exhausted and the volume of buying declines, prices stop rising, and the belief in future price increases diminishes. When the remaining potential buyers no longer believe in future price increases, the primary motivating factor to purchase is eliminated; Prices fall. The temporary rise and fall of asset prices is the defining characteristic of a bubble.
Real Estate Only Goes Up
The mantra of the National Association of Realtors is “real estate only goes up.” This economic fallacy fosters the belief in future price increases and the limited risk of buying real estate. In general real estate prices do increase because salaries across the country do tend to increase with the general level of inflation, and it is through wages that people make payments for real estate assets. When the economy is strong and unemployment is low, prices for residential real estate tend to rise. Therefore, the fundamental valuation of real estate does go up most of the time. However, prices can, and often do, rise faster than the fundamental valuation of real estate, and it is in these instances when there is a price bubble.
The mantra of the National Association of Realtors is “real estate only goes up.” This economic fallacy fosters the belief in future price increases and the limited risk of buying real estate. In general real estate prices do increase because salaries across the country do tend to increase with the general level of inflation, and it is through wages that people make payments for real estate assets. When the economy is strong and unemployment is low, prices for residential real estate tend to rise. Therefore, the fundamental valuation of real estate does go up most of the time. However, prices can, and often do, rise faster than the fundamental valuation of real estate, and it is in these instances when there is a price bubble.
‘real estate only goes up’ was also the mantra of bear stearns.
i agree with your entire screed, except i don’t believe we’re in the 3rd inning. i’d call it bottom of the 7th.
prices did get ahead of incomes, the miracle of the boom is that enough money got out and stayed out before the bubble burst, that at least 75% of the people are still paying their mortgages. flippers who were bidding up things back and forth like idiots are out of the game for a while (like CA, FL, iceland), but i believe letting the market continue to fall is wasteful and unnecessary wealth evaporation.
i also believe the markets should have halted trading on most stocks in december 2008. why would you possibly trade citigroup in 2008? because it was going to magically go higher, despite an economy to the contrary? 4 trillion of wealth evaporation in the stock market, we could have saved at least 2.2 trillion of that with forward-thinking market makers.
i agree with your entire screed, except i don’t believe we’re in the 3rd inning. i’d call it bottom of the 7th.
prices did get ahead of incomes, the miracle of the boom is that enough money got out and stayed out before the bubble burst, that at least 75% of the people are still paying their mortgages. flippers who were bidding up things back and forth like idiots are out of the game for a while (like CA, FL, iceland), but i believe letting the market continue to fall is wasteful and unnecessary wealth evaporation.
i also believe the markets should have halted trading on most stocks in december 2008. why would you possibly trade citigroup in 2008? because it was going to magically go higher, despite an economy to the contrary? 4 trillion of wealth evaporation in the stock market, we could have saved at least 2.2 trillion of that with forward-thinking market makers.
it’s not the fault of treasury or the fed (even though they do dangerously encourage taking on too much debt). it’s because we have fractional reserve banking. under it (unless we raise our capital lending ratios, which we never will–who do we want to be–canada?) we will have a boom/bust cycle every ten years. “exotic” mortgage products or no.
next boom could be in commodities, or tulip bulbs, or Fire Company trading cards.
as long as we can invent nine dollars for every actual paper dollar in the bank, somebody is going to screw that up, and everyone else is going to try to get theirs before it’s all gone.
don’t worry, the fed and treasury will be there to clean up the mess then too.
now is the time to do a ‘gtm’ because we’re in a deflationary spiral. the dollar keeps getting stronger and stronger (versus an american housing market value, not necessarily versus another currency).
freezing home values now works because the ‘gtm’ will set the floor. then, housing can continue it’s average boring 4-7% annual rise, inflation will kick in, and the spread between the outstanding mortgage and the “market” in 5 years in nil. voila. problem solved. you’re welcome.
did you really have lunch with shiller and schafer? what do you do by the way? ha!!!!!!!
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this was so good, i had to cut and paste it in its entirety.