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Teavo
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 Posted: Wed Feb 25, 2009 5:50 pm GMT Post subject: |
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| GenXer wrote: | | Teavo: Do you know 100% that you will not be struck by lighting? You don't. |
Right, I don't know it 100%. That is precisely what I said.
| GenXer wrote: | | 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? |
Wrong, I do know this. Divide the number of people struck by lightning in a given day by the population. It's a very small probability.
Anyway, pick your own metaphor if you like. My point is that some things are more predictable than others. And most things, if we have at least some reliable data or evidence to work from are more predictable than a coin flip.
A coin flip is an example of a complete absence of information from which to make a prediction. That is not the situation we have in today's real estate market.
| GenXer wrote: | | 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. |
Who said anything about "continuing risky behavior"? I didn't. Maybe you are responding to someone else?
Personally, I believe that not buying a house in today's market is the less-risky option. Apparently you disagree?
| GenXer wrote: | | 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. |
OK now you're making me laugh. Would you be happier if I included error bars on my next post? 
And yes I have confidence that my prediction will be somewhere better than "remotely" close to real events because, as I said in my previous post, all bubbles in recorded human history have played out the same way, and this one is the mother of all bubbles. I do not claim 100% prognosticative powers, but it's not hard to make reasonable predictions based on the evidence we have and have confidence that it's no worse than "remotely close". You are setting the bar quite low!
| GenXer wrote: | | 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. |
I think you may have overlooked some of my previous points.
If by "be passive" you mean "don't buy a house now" then we actually agree.
However, you seem to think that by "doing nothing" you disengage from the whole issue of judging risks and "making bets". That is false. If you remain passive (as a buyer) then you're "betting" that house prices will fall. You might think you're stepping back and not making a "bet", but you still are. Now, personally I think not buying is the right bet, but make no mistake: it's still a bet. Action or inaction, active or passive, whatever you do or don't do is a "bet" on the direction home prices will go. |
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Teavo
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| Posted: Wed Feb 25, 2009 5:52 pm GMT Post subject: |
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| Sorry, the recent post from "Guest" is actually from me. I forgot to fill in the username field. |
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Boston ITer
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| Posted: Wed Feb 25, 2009 5:57 pm GMT Post subject: |
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| Quote: | | If you remain passive (as a buyer) then you're "betting" that house prices will fall. You might think you're stepping back and not making a "bet", but you still are. |
There is that third option of a *sideways* housing market where the prices remain the same, however, the costs of maintenance & taxes, vs the flexibility of being able to move, for a new job, still makes for a lousy decision to buy, unless we're in a serious stagflationary environment. |
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Teavo
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| Posted: Wed Feb 25, 2009 6:01 pm GMT Post subject: |
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| GenXer wrote: | 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. |
Nobody here is saying that we can predict magnitudes and time scales. Please see my previous post about that. So I'm not sure who you're even arguing against on that point.
I'm not sure why you are so convinced that mean-reversion is a phantom. But be that as it may, just because something has not been proven to exist, does not mean it doesn't exist.
Are you familiar with the phrase "absence of evidence is not evidence of absence"?
You're basically saying that you believe home prices are a "random walk" and we can make no predictions whatsoever about future prices based on past prices. If that's true, then why do we see the same financial patterns play out time and again, everything from Dutch tulip bulbs to the South Sea to circa-2000 tract homes in the Arizona desert?
It's because it's not a random walk. 
Now, I don't claim to understand all the forces that shape the patterns in price histories. I don't think anyone can because they are too numerous and hard to gauge. But we can know something about it, especially because much of it results from human mass psychology, which might be a lot of things (irrational, crazy, etc.) but is not truly random. You can stick with your coin flip if you like, but I'll make use of the evidence as it stands, with the understanding that it's imperfect, but it's much better than nothing. |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Wed Feb 25, 2009 6:48 pm GMT Post subject: |
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Do you guys think that the money supply will revert back to the mean?
http://en.wikipedia.org/wiki/File:Components_of_the_United_States_money_supply2.svg
Think about a volcano. If it erupts and lava flows out, it actually makes lava rocks and the elevation of the ground gets higher. Now if we get lots of storms you'll see more mechanical weathering and it will wash away and the elevation will go back down again.
I think structurally so I think, what's supporting a price level? If people see long term prosperity living in Massachusetts that is one way to support price levels. Fewer people think this now than in 2003 so this force has reduced. We had a wealth effect multiplier that drove up the economy which is now working in reverse, which is reducing the force. We have less leverage of home sales to fuel refinancing which reduced the force. We have less people drawing out equity in their homes and bringing out wealth into the current economy.
All this stuff is what we're seeing today. Because each persons or banks portfolio of wealth is different, their specific heat, or the heat necessary to melt them is different. Bears Stearns held mortgage back securities so their boiling point was in a direct physical relation to the source of heat. People that thought they were insulated are feeling the heat now. I think people on this site are trying to warn others because they see the risk of being burned. I have total respect for those. The super wealthy love these times because they buy from distressed people.
Even with all this negativity, eventually prices will be such a value that people can't resist and they will buy. Depending on what it is, there will be different price floors. Because this is kind of a global issue, nobody can hide from it, and just because Massachusetts is in trouble doesn't mean that living here is worse of a decision than in all other areas.
Many of my recent posts have dealt with the emotional side of things because we all talk tough at times but when that blanket of anxiety hits you it is overwhelming and you wouldn't wish it on your enemy. The keel is the long term view, and if you don't have an emergency fund, oil in that emergency generator your lights could go right out. If you ever see one of those UFC knockouts where you see some big macho guy and then see him get hit on the chin and go down like a sack of potatoes. Even the toughest can get caught. If you know anyone who is tough, they'll even tell you that. |
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melonrightcoast
Joined: 22 Feb 2009
Posts: 236
Location: metrowest
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| Posted: Wed Feb 25, 2009 10:15 pm GMT Post subject: Pertinent article |
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| Boston ITer wrote: |
In a couple of decades, Boston added a million and Buffalo lost one. This era was known as the Massachusetts miracle, the rise of the big iron of DEC, Prime, Wang, DG, Raytheon, etc, and for Buffalo, the start of the rust belt.
What's happening now is that since the '02-'03 IT/telecom downtown, the Boston area has not re-invented itself like it did back in '92-'94...so it's a facade of a prosperous city than a real one. |
Boston ITer:
Here's an article that talks (at length) regarding the boom and bust of various cities. It is an interesting read, although the author's predicted outcome is that mega-metropolis corridors, such as the Northeast, will prosper.
http://www.theatlantic.com/doc/200903/meltdown-geography
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melonrightcoast ... are you? |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Thu Feb 26, 2009 1:13 am GMT Post subject: |
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| One thing that we've forgotten in this discussion is the next wave of ARM resets (2010). The gold mortgage rate spread is at unprecedented levels because the Fed is buying these mortgages to depress the rate. How long can they do it? Many people will refinance now but there are plenty of people in this country who don't realize that they should, are gambling on a lower rate, or are too lazy. I'm not saying that housing crisis part 2 wil necessarily happen but its a real possibility. |
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melonrightcoast
Joined: 22 Feb 2009
Posts: 236
Location: metrowest
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| Posted: Thu Feb 26, 2009 3:27 am GMT Post subject: refis |
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| balor123 wrote: | | Many people will refinance now but there are plenty of people in this country who don't realize that they should, are gambling on a lower rate, or are too lazy. I'm not saying that housing crisis part 2 wil necessarily happen but its a real possibility. |
From some of the stories that I've read, many people cannot refinance now because 1)they don't have enough equity in their homes and/or 2)their credit rating is too low to qualify for those "historically low" interest rates and/or 3)their income has dropped due to un/underemployment and they now do not qualify for the amount of their current mortgage.
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Boston ITer
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| Posted: Thu Feb 26, 2009 3:58 am GMT Post subject: |
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| Quote: | melonrightcoast: Here's an article that talks (at length) regarding the boom and bust of various cities. It is an interesting read, although the author's predicted outcome is that mega-metropolis corridors, such as the Northeast, will prosper.
http://www.theatlantic.com/doc/200903/meltdown-geography |
It's funny because a friend and I were discussing this article a few days ago. Interestingly enough, my arguments as to why although the city of Philly is a dump but the metro areas, surrounding it, stayed prosperous has to do with the mega-metropolis effect. In effect, the zone between NYC and DC is a version of the Southern California sprawl but w/o the weather. Boston's connection to this network, however, is through its universities. Really, the bankers who'd grown up in DC to NY, only visited Boston for Harvard (plus MIT, Wellesley, Brandeis, & Tufts) and little else. This also goes for other rising middle classers in the mid-Atlantic; Boston's the key private college town of the Northeast. There's really a drop off in urbanization, starting from New Haven. That's kinda where the Red Sox Nation defines the start of the Yankee's "Evil Empire".
Boston is in the same category, from the mega-metropolis axis, as Richmond VA on the DC side, but it's obviously a far superior city in every way. So the problem then is that if the core of Boston, education, looses its national appeal than we could be seeing a long term trend here in the opposite direction. |
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melonrightcoast
Joined: 22 Feb 2009
Posts: 236
Location: metrowest
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| Posted: Thu Feb 26, 2009 4:54 am GMT Post subject: credit education |
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| Boston ITer wrote: | | So the problem then is that if the core of Boston, education, looses its national appeal than we could be seeing a long term trend here in the opposite direction. |
Yes, I'd have to agree with you on this. The universities and Boston's reputation as the place where people go to get an education is Boston's defining industry. Loose the universities, or maybe even just the reputation, and Boston's light could dim. And this bursting credit bubble could be the catalyst for this to happen. I listened to a program on NPR today about student loans and the guest/author was making the correlation between the credit bubble in the housing market and the credit bubble in the student loan/university industry. I hope more people pick up on this correlation, because IMO, our society has been RUINED by the banks handing out credit to everyone. I am guessing this happened because wages have not increased (much) for the past ~10yrs and it was the only way to keep profits going up... extending credit. And now that the banks have stopped handing out credit to everyone, prices for EVERYTHING that was typically purchased with credit SHOULD come down (houses, cars, vacations, college). Unless the government is successful in keeping the prices artificially inflated by credit (which is what they are trying to do by encouraging the banks to lend), or wages suddenly increase, there will be deflation on items often/usually purchased with credit.
Here's the link to the program on NPR: http://www.onpointradio.org/shows/2009/02/student-loans/
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Thu Feb 26, 2009 5:44 am GMT Post subject: |
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| Boston ITer wrote: | | Philly is a dump but the metro areas, surrounding it, stayed prosperous has to do with the mega-metropolis effect. |
My wife is from Philly so I'm there all the time. It definitely has some dumpy parts. I consider it a step down from Boston despite being considerably cheaper to live in. Funny thing about Philly is that it has the most universities right behind Boston and that doesn't seem to have protected them. I suppose MIT and Harvard will always be MIT and Harvard. But can they sustain a city of several million people? |
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GenXer
Joined: 20 Feb 2009
Posts: 703
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| Posted: Thu Feb 26, 2009 11:38 am GMT Post subject: |
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balor123: Definitely not forgotten ARMs - please see 'letter form a realtor' thread - I dug out all of the data I could find on this topic.
john p: If anything, the government's meddling can create unforeseen problems. As far as reverting to anything, do we even know what the mean is? Which mean is that, the one for the past 100 years, or the one in the next 100 years? Too many unknowns, and guessing is a sucker's game (especially in a game with high payoffs/losses).
Teavo: Random walk is not a game where 20 sigma events happen. Ever. Maybe once in a billion years. We are living in an extreme random world, where the games we play (many of them, but not all of them) have a small (but not infinitely small) probability of a very high payoff or loss. Housing market, stock market, futures market are NOT random walks. A 'random walk' is essentially a Gaussian, and unfortunately, the stock market has been shown to be a lot more extreme in the tails than a Gaussian would have us believe.
As far as reversion to the mean, lets not go in circles - I said we don't have evidence of it. Period. There is nothing more that can be said. Whether it exists or not, we can not take it for granted that the markets (which are not random walks) revert to the mean. Thus, everything I said about the chart stands.
About your odds of playing a game. Lets forget being struck by lightning for a minute. Lets instead buy options or futures, or trade stock, or even better, make economic predictions. If in our world we have a probability of an extreme random 20 sigma event (i.e. you can lose all of your money in an instant), then TRYING to predict this event (and I don't mean guessing the outcome - I mean doing a rigorous statistical analysis) will introduce large estimation errors. This is not philosophy - this is a provable mathematical result:
http://www.fooledbyrandomness.com/central.pdf
And all of the crises in the past did NOT behave the same way. Not even remotely. If they did, we wouldn't be having them quite as often as we do. They are always unexpected. Our predictive powers suck, and we will save ourselves some grief if we admit it. And yes, I do expect people who are SERIOUS about predicting the future to provide a confidence interval, because the track record of anyone predicting anything is no better than flipping a coin. Try a study done with Harvard MBAs - they couldn't estimate anything with better than a 40% accuracy. So it is better to flip a coin for most of us who suffer from a big ego. I don't take my 'predictions' seriously, and I freely admit I can be 100% wrong on everything.
If we know one thing - we are too sure of our knowledge. We are always sure that information is always ADDING to our knowledge, while in this case, information is SUBTRACTING from it, because we become too sure of ourselves and start making too many assumptions.
As far as 'betting' on house prices to fall, I already mentioned this elsewhere: if you can not afford to buy a house, you are not betting on anything. You are simply waiting untl the house becomes affordable. Either you are trying to make more money, save more money, regarldess whether house prices to fall, which they may or may not. There is a risk that a house may not become affordable, in which case you rent. You are a 'mechanical' buyer - not a market timer. When you can afford you buy, regardless of where the market is going. Yes, there is a risk that you will not stay in this house for long, that you will be underwater, etc. But if its cheaper for you to buy than to rent, WHO CARES? |
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Boston ITer
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| Posted: Thu Feb 26, 2009 1:46 pm GMT Post subject: |
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| Quote: | | balor123: I consider it a step down from Boston despite being considerably cheaper to live in. Funny thing about Philly is that it has the most universities right behind Boston and that doesn't seem to have protected them. |
I knew a slew of people who'd attended Temple, Penn, and Drexler and there are all kinds of stories from that area. In essence, for those who'd come from safe towns and formerly safe campuses (Amherst, Ithaca, Urbana-Champaign, etc), it was a scary place to attend college.
The Temple area was like Fort Apache and the western and outer fringes of the Penn/Drexler complex was its west end equivalent, kinda like our *south of Huntington Ave* area.
Really, that big residential tower on 1400 Chestnut was mainly a security zone for Wharton attendants to hide (I mean sleep) in more than anything else. The McDonalds, next to campus, was known as "McKnife" for a stabbing of a Wharton student some dozen years back.
All and all, the best part of Philly is that for a major metropolitan city, it was cheaper to live in than either NY or Boston, for the college student, but in the end, everyone would rather of had their campuses out by the main line with Bryn Mawr and Haverford Colleges than in the city. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Thu Feb 26, 2009 4:02 pm GMT Post subject: |
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| GenXer wrote: | | Try a study done with Harvard MBAs - they couldn't estimate anything with better than a 40% accuracy. So it is better to flip a coin for most of us who suffer from a big ego. |
I'd be interested in reading this study, if you have a link handy.
- admin |
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GenXer
Joined: 20 Feb 2009
Posts: 703
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