bostonbubble.com

[nickbp]

[Renterstill]

[GenXer]

nickbp: Too many provisions for my taste. Do you realize that it only takes a SINGLE unexpected event to derail every projection out there? In fact, this is exactly what we've been experiencing. I think we need to take the rose-colored glassess off for a change.

[ruby23]

All assessments in Mass are done the same way which is based on data that is from 2 years previous. This means that if a house is appraised in 2009 for 350k that number is based on data from 2007. It's all well and good in a market that is going up , no doubt it will sell fast however you have RE agents doing this now and these houses are not moving. I can' t tell you how many houses I've looked at that have been on the market 1-2 years with an asking price that is within 10k of a 2009 appraisal. The market has come down drastically in two years so if the market analysis values were 350k in 2009 (2007) values that means the house is really worth somewhere in the vicinity of 250k. When the pricing is adjusted to reflect the downward trend for two years the house sells quickly. The prices are way off!! I used to sell RE. It seems most realtors are not even aware of this. You can check with the state this is how the assessments are done. In the end the RE agent is doing his client a great dis-service because he/she is causing you to lose money over time if your house is not priced to sell in 90 days or less. That's the rule of thumb. If you are selling look to see how close you are to the assessment value. If your house has been sitting I bet it's very close to that value.

[john p]

You're right that the basis for a town's "assessment value" is on an evaluation year, and that year might be substantially different than the current.

The way it is "fair" is that you have an assessed value and then a tax rate. If all the properties in town added together was equal to say $140M, the town might tax at $11.4 per thousand. Now say that the real estate values drop 20%, that means that in order to collect the same tax amount plus the 2.5% increase (due to Proposition 2 1/2) they just increase the tax rate to say $13.5 per thousand. Essentially, you should pay the same amount of taxes year over year with just a 2.5% increase.

Fluxuations do come about if say your particular type of house is becoming more or less valuable relative to the others in town. These variations do occur, but if you can find comperables you have a case to get an abatement.

The key isn't just to benchmark against the "assessed value" but to benchmark the current market delta between the "assessed value" and the "asking price". For instance, if houses are selling at 95% of assessed value, that is what you look for. Ideally, the town assessor has built a value structure based on their evaluation year of a prior year's sales activity. It's kind of like a shortened Case Shiller matched pair concept. It is kind of a good benchmark to use as a tool. It is better in some ways from Case Shiller because it is real local and you can actually drive to the places and see that one place might be a little better because of a view or a busy street or better condition, etc.

The next level of sensitivity is actually getting inside the comps to get a sense of the interior quality, knowing that a good kitchen or bathroom is expen$ive, the same square footage house that was owned by Archie Bunker without updates might be worth less than someone that had updated it...

Is the "Pottery Barn" look still current? I used to love to hear the realtors take design terms, and not so design terms out for a test drive.

[GenXer]

ruby23: What you are describing is an emergent property of a system where you have a large number of players attempting to do things simultaneously. When things are nice (or going up) nobody seems to notice how FAST prices have risen. Let me put it this way. If you want to know how fast or how far prices can fall, just look at how far and how fast prices have risen in the past, and reverse that (with a minus sign). I think people will be shocked to find out that this is very much a possible outcome in a market like this, which is driven by millions of transactions, often happening very quickly (or not happening at all). Think about what happens to a price of stock when nobody is buying - it goes down like a rock until buyers step in. Until people put things in perspective (not gonna happen any time soon, I'm afraid), they will continue to be (willing) victims of the market.

[john p]

GenX-er:

What do you make of the M3 (money supply) skyrocketting in the past 5 or 6 years. Don't you think that we'll get inflation just due to the change in property of the value of the Dollar? I mean if you heat up water to its boiling point and then you add in a lot of salt, that new solution is not water and it won't boil at the same temperature as water.

I mean what is the measure of fundamentals? The house's value might not change, but the unit of measure to evaluate has. For instance, if you say every dollar is an inch, how long would the value be for a house? If the distance stays the same and the dollar shrinks from an inch to 5/8" it will take more inches to cover that distance.

A Dollar is a unit of measure and the Dollar is the wildcard. Until the Dollar gets back to its fundamental unit of measurement, how can you think that the value for what is being measured is the issue?

[john p]

I meant to say it will take more dollars to cover the same distance...

[GenXer]

I get your point. However, you have to realize that
1) Often, the scale of the market remains the same, meaning that whether you look at short or long scale, large fluctuations remain
2) We know that prices are scale invariant (i.e. allowing large fluctuations as well as small ones), this means that the fundamentals for the most part don't mean much. That is, unless subjected to extreme events (such as bankruptcy or buyout when discussing companies), any one fundamental factor is too small to affect prices by itself.

So, in other words, house prices are like leaves in the wind, subject to the dominant wind, which may have originated somehow from millions of players blowing in unison, with the prices moving a lot when a lot of people either buy or sell, or not moving much when the number of buyers and sellers are smaller. It it more complicated than this, but because we know from research that when large quantities of something are bought or when nothing is bought, prices can move erratically regardless of fundamentals, whether short or long term.

So, in more words, yes, inflation is a problem, and a big one at that, but it is a gradual problem (prices are supposed to go up!). Unless we turn into Zimbabwe, our inflation, while large, is not large enough to wipe us out. House prices, on the other hand, can fluctuate a lot more than inflation can, therefore fundamentals are irrelevant when we are in the high volatility mode. And there is no definite correlation between inflation and prices! Even the originators of the ideas admit that some prices can move down despite what 'fundamentals' like high inflation is implying, for whatever reason.

[john p]

I wasn't so much meaning inflation, I was talking money supply.

http://en.wikipedia.org/wiki/File:Currency_component_of_the_US_money_supply_1959-2007.gif

Where is all this money going? I know that we only have approx. 3% inflation per year in the past decade or so (flat this past year), but clearly, the money supply has grown faster than 3% a year.

Because wages have stayed with inflation and the money supply has skyrocketted, I think that those that trade iand get a taste of derivatives made a lot in the past ten years. This is what I attribute a lot of the shear in wealth between the rich and poor, on top of the fact that people in the manufacturing i.e. automakers got tied to foreign competition (or should have anyway...).

http://static.seekingalpha.com/uploads/2009/5/7/saupload_liquidity_pyramid_1.jpg

http://www.itulip.com/images/liquiditypyramid.jpg

I am curious what you think of all this wealth that made it to the derivatives stratosphere. I see wealth like liquid as cash, and vapor as derivatives and because the derivatives atmosphere had no bounds it never created the pressure to turn the vapor into rain drops and create the trickle down economics. I think that this current situation is essentially a burning off of the excess derivatives. People who trade in an "assets under management" model get screwed because much of this phantom vapor wealth has evaporated.

I like your leaves blowing in the wind metaphor but I think that lateral drift as you describe it has a range and the "leaves" range was based on lending standards and availability of credit. I think a lot of the contraction is based on this contraction of credit and job losses.

[GenXer]

Inflation that is 3% is a lie - it is and was much higher than that.

Money is going from one pocket into another. Government is printing money, and issuing Treasuries. Chinese are buying treasuries, and the ones not bought by the Chinese are bought back by the government. If this sounds like a Ponzi scheme - it is.

Leverage is another way to inflate the money supply, but don't confuse leverage with the money supply itself. Leverage does not create money, though the way it is used can and did fuel some of the speculative investment strategies. Leverage can hurt you bad if investors withdraw their deposits, so leverage is just another way to make more money while everything is good. When things turn bad, taxpayers are on the hook for the losses if the government decides to bail the banks out (which it did, foolishly so).

Our manufacturing base has been shrinking for years - we do not produce. So when service and retail goes down - so does the economy. You are right that AUM model is hurting bad because there isn't much money to be borrowed. Ideally, this is how somebody makes money - borrow at X%, invest at X+Y%, or lend at X+Y%. If there is no borrowing, there is no lending. But there is still plenty of money - people are simply sitting on it. I'm not going to give up the stock market just yet, and I think people may get fed up with government takeover of everything eventually.

Any way you look at this, the government is making it worse, and it is only a matter of time before the bills are due.

[john p]

I totally appreciate your time. I guess what I'd want to hear more from you is your thoughts about just elasticity, meaning "reverting to the mean" mentality. My feeling is that if you change the properties of the material, you change the elasticity and all the behaviors because it is a different substance. I know you're asking me to separate a certain percentage from my application of this logical model (confusing leverage with money supply), but hasn't a certain amount of leverage deformed the measure of value?

In my mind, I see it this way, colleges tell parents that they need to dip into their home equity to pay for tuition, this gives parents deeper pockets to reach into, which affords colleges to hike tuitions. As the housing bubble added "equity", college tuitions rose. Next, you get a guy who wants to buy a boat, he takes out his "equity" refinances and buys it, using the tax shelter of a mortgage to pay for a luxury. Because he doesn't actually have the money lying around, boat prices are not held into check by typical affordability limits. Further, because he can tax shelter a portion, he can pay even more. This is the same for a person who does an addition, goes on vacation, etc. Because so many people were tapping into "home equity" it made everything simply cost more because the guy who wanted to buy the boat out of cash he saved had to compete with the hundreds of others who were bidding the price up using borrowed money. What you're saying is that this leverage is gone and things are going to fall back to the price that the guy with money in his pocket can afford right? Others who hold investments of this phantom derivative vapor value either have it worth confederate money, or get it insured by the Federal Government i.e. Fannie Mae and Freddie Mac or any of the investments in the subprime paper?

I'm trying to find out how much of all this money supply made it to the light of day? I mean a lot of this is going to be written off (deflation) and now the intention of the government is to inflate it as well to bring it down more slowly. Although economists like Paul Krugman say that the amount of the derivatives is huge compared to the stimulus and he wanted more stimulus, I see it as all the people who owned that paper just had paper gains anyway that weren't real and there was so much paper wealth that it wasn't necessary anyway as most of it wasn't in play. For example, if the top 1% had all this paper wealth, if it evaporates, it isn't like they won't be able to still buy the top 1% of homes out there, as the same 1% will have the wealth and if their net worth is worth $50M versus $75M they don't have to bid $10M on a property any more because the same people they were bidding against are in the same boat and their $50M buys the same stuff?

[GenXer]

You are now firmly into philosophy I like philosophy, but its really not a technical field (unless that is you are into quantitative study of human behavior, which is a very interesting field to explore). There is no way to measure something that is amorphous. Averages do not capture the effects of leverage. If the underlying effect has potential for a very large deviation, leveraging will make those deviations even larger, so such an effect can not be measured accurately, and can not be described by a simple number. Consider the fact that this is a time dependent process (i.e. how money works its way through the system). We can measure things after the fact, and we can do 'averages' and we can try to reduce these interactions down to a single number, but it is like saying that the weather 1 year ago on this day was so and so - completely useless and without any predictive or informative power. This is why I hate to speculate on such complex, almost ephemeral concepts as an 'Effects of Availability and Uses of Institutional and Individual Leverage on the US Money Supply' - sounds like a topic for a Ph.D. thesis, doesn't it?

I sleep better at night knowing that what I do know can be written down on paper and simulated on the computer. You realize that 90% of papers published in econometrics (including potential PhD theses like the one mentioned above) are fluff? And even if you read them all, you will get a good exposure of somebody's faulty use of math at best, but you wouldn't be able to tell a good paper from a bad one, until you tried using these results to make money, which is when you find that even the 10% of papers that are good, 99% of them are completely useless in that respect.

What you are doing is picking a single path in a multitude (possibly, infinity) different possible paths and dependencies. You can probably think of a dozen different paths, some of which will directly contradict each other. This is why I like to leave this to a computer. Just define your variables, define your ranges, and let the computer do the philosophizing, so that you end up with a good statistical answer to your question. Otherwise, its a waste of bandwidth, if you know what I mean.

[john p]

I agree it is like trying to herd cats. I guess you can ignore it so long as you’re not a cat herder. If you have a lot of cats in your environment, I guess it is an important skill to acquire…

A friend of mine presented an architectural project to a review board and one reviewer said that his work was very disciplined and looked like it had been chiseled. He said that the building was on a very long and moderate slope and that his project did not address this condition. The reviewer said that although it is good to be disciplined, it is important to choose the appropriate disciplines given the challenges and the opportunities.

I say this because although having data that is based on quantifiable data sounds like it is on solid ground, by using this filter to discount anything that isn't quantifiable is ignoring the substantive matter that creates resistance and distortion.

As an architect we blend science art and psychology. Take egress in a fire. Our industry rates the building materials so we understand the properties of them with respect to fire resistance and smoke containment, etc. This is the science. The psychology comes into play in the research that suggests that people's first reaction in exiting a building is to return to the place that they came in. Even though I can draw a faster route for a given point, I have to account for people going a longer route based on this psychology.

Now I am with you for the most part, I sit in the seat where you have to be a grown up and be solid in the society. I stepped down from my town's finance committee because they were picking and choosing different basis to evaluate things. It was basically politics over policy and I just didn't have time for it. I've been given a lot of responsibility at work and lots of people depend on me to deliver and we're in a competitive environment so I don't have time for nonsense. If I weren't so busy, I'd hang in there because purging out nonsense was the whole point of me being there. I guess I just expected that people valued a professional due diligence.

I tell this story because what I'm saying is the bridge between psychology and math. Before the awards or money starts to flow into an organization, you need to have a value structure to value the things that will bear fruit. When we design foundations we need to know the soil properties to determine how much load it can take. Taking a temperature reading of politics and psychology will help you predict quantifiable outcomes. For example, if I was asked to audit a project that was failing, I'd talk to the key people on the project. If they were lazy or dumb, I could predict what crap would come out of them.

Getting back to your original point, certain values track fundamental progressions and then there are the environmental factors like the range of the leaves blowing left and right. In that metaphor, I would say that leave cover would fundamentally surround the areas that had those trees and the local drifts of the leaves would be the microclimatic factors.

I guess I'm unsure how you filter out the nonsense without losing sight of reality, which includes nonsense at times. I guess I'm pressing on this because I'm at the age now where I'm trying to have both coexisted so that I can be productive and relevant.

[GenXer]