bostonbubble.com

StallionMang · Joined: 29 Apr 2008 Posts: 54

This is a very timely topic, as my wife's nesting instinct is coming on strong - john p, you're right about that Smile

I see two reasons to keep waiting:

1) Unemployment is rising. This will reduce supply and increase demand. No way around it. Unemployment leads housing prices.

2) Historical housing prices - there is a lot of downside for prices to come down to a reasonable level. Talk about a falling knife!

I was talking to a colleague who is in Ireland -- and still owns a home in the US. He convinced his wife to rent. Now they are moving and she is VERY glad they rented.

melonrightcoast · Joined: 22 Feb 2009 Posts: 236 Location: metrowest

john p · Joined: 10 Mar 2006 Posts: 1820

StallionMag:

I don't see anything unusual in that chart you posted. Nothing seems out of the norm.

Am I missing something?

GenXer · Joined: 20 Feb 2009 Posts: 703

To play the devil's advocate here, but there is no theory which supports the assumption that prices have to return to normal, or that prices do so in a dramatic fashion. Some facts
1) We have not observed 'reversion to the mean' in the data for the stock market or real estate prices.

http://homepage.mac.com/j.norstad/finance/rtm-and-forecasting.html#rtm

2) Our sample set is too small (even 100 years may be too small!) to be able to correctly predict what will happen in the future to prices with any reasonable degree of accuracy

http://www.fooledbyrandomness.com/central.pdf

Conclusion: I can draw up any chart I like - it will look convincing, but it is nothing more than a guess, a RANDOM guess at that, because it is not based on any kind of mathematical theory.

Take most of these 'predictions' with a grain of salt and don't bet any money on it. We may or may not get lower prices in the future. I think it will probably happen, but HOW exactly or when, or even if - these are questions only time will answer.

JCK · Joined: 15 Feb 2007 Posts: 559

Teavo · Guest

Your argument that "we can't know the future" is one that I've often seen trotted out by real estate bulls when they don't know what else to say in the face of overwhelming evidence of a grave bear market.

Of course nobody knows what will happen in the future. That applies to everything: real estate, sports, politics, and quantum mechanics (well, OK, maybe except for death and taxes).

That doesn't mean we cannot make reasonable estimates and predictions that we can expect are more likely to be correct than the random flip of a coin.

For example, I don't know that I'll get through the day without being hit by lightning or winning the lottery. But I am 99% sure.

I don't know that the housing market will continue to go down. But I am 99% sure.

The current global real estate/credit bubble is the largest in recorded world history, which is a pretty sizable sample. Every single bubble in that time has followed the same pattern and so far this one is no different. Does that mean we "know" it will play out as all the previous bubbles? No, because maybe a giant meteor will strike our planet today and change everything. Hey, it could happen. But otherwise, I think we can be pretty sure that bubbles are bubbles, that they rise high, then crash hard. And that's what's happening now.

I'm afraid that your "don't bet money on it" advice is impossible to follow. If you buy a house, you're "betting money" that prices will rise. And if you don't buy a house you're betting money that prices will fall. No matter what a person does or does not do, it's effectively a bet on housing prices, either up or down.

So we do the best we can with the evidence we have available. It's a lot better than passively throwing up one's hands and leaving it to fate.

JCK · Joined: 15 Feb 2007 Posts: 559

No. You misunderstand my argument. My argument is primarily that drawing lines on a graph is a terrible, terrible way to make a prediction. That's why I absolutely despise those sorts of graphs. Please draw a graph with the last five years removed, draw a similar line (based on the five years before that) and tell me how predictive that line is.

There are many reasons to believe prices will drop in the near future, and I'm not arguing against that premise. I am arguing, however, that these sorts of graphs have no predictive value whatsoever, and only serve to mislead, rather than educate.

You don't know how quickly or slowly prices are going to decline, even if we accept that they are. That graph implies that we have some idea of the timeframe or the extent of the decline, which we simply do not.

Boston ITer · Guest

john p · Joined: 10 Mar 2006 Posts: 1820

My theory relates to the properties of the market.

For example, by the FED flooding the money supply and the multiplier of wealth that goes along with that, he has deformed the fundamentals.

For example, if water is in the form of ice it has structural properties, you can walk across it and go fishing. If it heats up you can't walk on it unless you're Obama. It de-formed, changed form, changed state from one state that had a set of properties to another that has another state of properties.

That "specific heat" of when a material changes properties differs from one price point and one seller/ buyer to another. Certainly this economic situation has changed the properties of the situation. I know a Chartered Financial Anaylist that is sweating his job this very day. He's got like 25 years experience so his "solid standing" is now a little slushy. I pray to God he keeps his job as he is a sole earner and has two kids and a wife that was diagnosed with Breast Cancer. If you're the praying type, maybe do a shout out for this guy and many others in a similar deal...

This specific heat is sometimes hard to detect, I mean Bernanke didn't see the meltdown of many of the banks until it got up and close this past September. Knowing Alt-A's are coming and understanding the stresses and strains on the system give you a sense of the pressure of things but think about how all the fundamentals pointed to a recession in 07 and things held out till mid 08, I believe that was the amount of heat right before the meltdown. Again, we line fireplaces with bricks because they don't conduct heat; that is not to say they don't absorb heat. In these rich towns, many of the families have a cushion to keep them from a month to month meltdown, but many of their steep monthly nuts might just give them so many gallons of oil in their emergency generator and that might just run out abruptly, it just might take until the end of that tank. That brick will eventually get hot, it just takes longer...

GenXer · Joined: 20 Feb 2009 Posts: 703

Teavo: Do you know 100% that you will not be struck by lighting? You don't. You simply assume that your chances of that are small. Well, what if you do NOT KNOW what your chances are? Then will you still say that taking a chance is BETTER than flipping a coin? How can you be sure? What if your chances are 60:40, and a coin flip is only 50:50?

Let us not get too arrogant with knowledge. We don't always know enough to make even an educated guess. Sometimes it is better to say, "I don't want to play that game because I DO NOT KNOW MY CHANCES".

Moreover, the outcome of sports and quantum mechanics has been shown to be 'nice' randomness, much like a coin flip. However in a game with HUGE payoffs or losses happening with a LOW probability the stakes are much higher. Just because we do NOT understand randomness doesn't mean we should continue our risky behavior as if the risk of losing a coin toss is the same as a risk of losing a job, a house and becoming bankrupt.

Are you SURE that your prediction will be even REMOTELY close to the real events? What is your estimation error? If I had to guess, it is much larger than you realize. If everything lended itself to nice and bounded solutions we wouldn't BE in this mess. So please, let us learn humility and let us not jump with claims about our prediction abilities which are ludicrous at best.

Sometimes it is better to just accept that we are clueless and not do something. Sometimes it is better to be passive, and save us from ourselves.

Guest · Posted: Wed Feb 25, 2009 5:26 pm GMT Post subject:

GenXer · Joined: 20 Feb 2009 Posts: 703

Guest: Even though this may happen, we do not know when or how, or even IF the prices 'revert' to some historical norm. Mean reversion has not been shown to work, at least as of today, when we try to predict the future based on the results from the past. Period. Anything else would be random guesses. Prices might come down below this 'norm', or they may stay above it, in any case, I think it is MORE likely that a new 'norm' will be the NORM in the future, above or below the current one. This is why this chart is MISLEADING at best, as it assumes that
1) Mean reversion is real
2) We can predict the magnitude and the time scale of it, which we can not
I can doodle a chart and I'll be probably more correct in my 'prediction' than this chart.