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Great Article: Buy, Sell, or Hold

 
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Mike



Joined: 01 Nov 2006
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PostPosted: Wed Nov 07, 2007 6:24 pm GMT    Post subject: Great Article: Buy, Sell, or Hold Reply with quote

http://money.cnn.com/2007/11/06/real_estate/home_prices.fortune/index.htm

This is the most well-written article I've ever seen about home prices released by a national media source. What do you guys think? The author even goes into some depth about P/E (price/rent) ratios.
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admin
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PostPosted: Thu Nov 08, 2007 9:48 pm GMT    Post subject: Reply with quote

I've always been impressed with Shawn Tully's articles and talks. I went to the lecture he gave at MIT a little over a year and a half ago, and he was also on "The Natural Truth" in the same episode that Michael Graham had me on.

They are predicting in the article that Boston housing prices will decline an additional, nominal 5% over the next five years. This is in contrast to the S&P/Case-Shiller futures which have priced in a decline of 13% over three years, at last check. Interestingly, maybe part of the difference is because the futures currently show a bottom in 2010, and so the two predictions may not be as far apart as they seem since increases in 2011 and 2012 could erase some of the decline. We'll get a better picture when the 2012 futures are released this month (I think).

The company that Fortune got their rent data from, Property & Portfolio Research, is actually located here in Boston. I looked at their website to see if I could get the raw rental data for the Boston area, since I have been wanting to make a price to rent graph for quite some time. Unfortunately, the data is in for-pay reports. It may be worth purchasing a report, but I imagine they would not want the content shared here.

By the way, there is a spreadsheet that makes use of the data from the article here:

http://bubblemore.blogspot.com/2007/11/price-correction-calculator.html

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BK-Former Owner
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PostPosted: Fri Nov 09, 2007 11:39 am GMT    Post subject: Simplistic Logic of Journalists Reply with quote

I'm not a big fan of this article because it follows the standard and over simplified to explain VERY-VERY Complex Market for Mortgages.

The Article completely ignores how the real wrinkle in future home values - The Secondary Market for Mortgages.

Merrill Lynch and Citi Bank are in the news every day because of bad loans in the secondary Market.

How does it work?
Your local Mortgage Banker or local Bank offers to make a loan to the Average guy or Gal in order to sell the loan off to a large Financial Institution (your Mortgage gets rolled up -with lots of other loans- into a Mortgage Backed Security Bond. Prices in Real Estate got extreme because it was so easy to sell these Mortgage Backed Secured Bonds to Financial Institutions. This resulted in Mortgages being offered to any person who had a pulse and could sign their name.

Today Merrill Lynch and Citi are in the news because they bought a lot of these Mortgage Backed Bonds and the Bonds are turning out to be worth a lot less than Merrill Lynch had paid for them.

This means there are going to be a lot fewer Mortgages offered to people in the future. Large Financial Institutions are going to get very selective about the underlying Mortgages for the Mortgage Back Securities that they buy. The old standard of having a pulse and signing your name is out the door. Mortgages will be granted only to folks with a down payment, great credit score, or a well heeled co-signer.

Any article that doesn't touch on the connection between future home prices and the current sub-prime Mortgage Bond mess isn't worth reading.
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BK-Former Owner
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PostPosted: Fri Nov 09, 2007 11:40 am GMT    Post subject: Simplistic Logic of Journalists Reply with quote

I'm not a big fan of this article because it follows the standard and over simplified to explain VERY-VERY Complex Market for Mortgages.

The Article completely ignores how the real wrinkle in future home values - The Secondary Market for Mortgages.

Merrill Lynch and Citi Bank are in the news every day because of bad loans in the secondary Market.

How does it work?
Your local Mortgage Banker or local Bank offers to make a loan to the Average guy or Gal in order to sell the loan off to a large Financial Institution (your Mortgage gets rolled up -with lots of other loans- into a Mortgage Backed Security Bond. Prices in Real Estate got extreme because it was so easy to sell these Mortgage Backed Secured Bonds to Financial Institutions. This resulted in Mortgages being offered to any person who had a pulse and could sign their name.

Today Merrill Lynch and Citi are in the news because they bought a lot of these Mortgage Backed Bonds and the Bonds are turning out to be worth a lot less than Merrill Lynch had paid for them.

This means there are going to be a lot fewer Mortgages offered to people in the future. Large Financial Institutions are going to get very selective about the underlying Mortgages for the Mortgage Back Securities that they buy. The old standard of having a pulse and signing your name is out the door. Mortgages will be granted only to folks with a down payment, great credit score, or a well heeled co-signer.

Any article that doesn't touch on the connection between future home prices and the current sub-prime Mortgage Bond mess isn't worth reading.
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admin
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PostPosted: Fri Nov 09, 2007 2:27 pm GMT    Post subject: Re: Simplistic Logic of Journalists Reply with quote

BK-Former Owner wrote:
I'm not a big fan of this article because it follows the standard and over simplified to explain VERY-VERY Complex Market for Mortgages.

The Article completely ignores how the real wrinkle in future home values - The Secondary Market for Mortgages.


I agree with you that the mortgage landscape has had and will have an enormous impact on prices. I think the type of methodology used in the article accounts for that implicitly, or at least would if the timespan were larger. The assumption is that there is a normal price to rent ratio for each market, and if that ratio is out of line with what it has been historically, it will eventually adjust back. This fits in perfectly with what you're saying - the ratio is out of line because the mortgage market got reckless, and it will adjust back to normal because the standard lending practices are returning. Their method works regardless of what the underlying cause is, unless you're dealing with a new paradigm shift (very unlikely).

Where I think the article falls short, particularly with regard to what you mentioned, is that the timespan of 15 years that it uses is entirely too short. I've heard before that real estate cycles are roughly 10 years long, in which case this only covers one and a half cycles. I'm not sure at what point it would become statistically significant, but even 10 such periods (100 years) seems scant, and 1.5 cycles is just too small to reliably extrapolate. Particularly in this case, we have had bubble prices for about half that time, so that is going to skew the historical P/E ratio and make it way too high. The mortgage market anomalies that you pointed out are too dominant given the limited time frame.

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admin
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PostPosted: Fri Nov 09, 2007 6:29 pm GMT    Post subject: Reply with quote

Another problem with the study just occurred to me. It uses price data from the NAR. It therefore doesn't reflect changes in the quality of what is being sold. For instance, maybe the median price will buy you a 3 bedroom this year and a 4 bedroom next year. They should have used the S&P/Case-Shiller Index, though I suppose that would have significantly reduced the number of cities that were covered.

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socal joe
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PostPosted: Wed Nov 14, 2007 5:04 am GMT    Post subject: tully article/inland empire/spreadsheet Reply with quote

Hello all,
I'm a little confused. When I read the Tully article, it seemed to imply that the housing correction in the inland empire would finish by end of 2008 for various reasons. But when I do the spreadsheet, it implies that the end of 2008 is the peak of the "rate of yearly correction" and shows significant corrections in the years that follow as well.
thanks
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PostPosted: Thu Nov 15, 2007 4:02 am GMT    Post subject: Re: tully article/inland empire/spreadsheet Reply with quote

socal joe wrote:
Hello all,
I'm a little confused. When I read the Tully article, it seemed to imply that the housing correction in the inland empire would finish by end of 2008 for various reasons. But when I do the spreadsheet, it implies that the end of 2008 is the peak of the "rate of yearly correction" and shows significant corrections in the years that follow as well.
thanks


My impression of the Tully article was that there was vagueness as to the way that the declines would be allocated over the five year period. He quotes Zandi as saying that the bulk could happen in some parts of California and Florida by 2008, but I didn't see anything more specific than that. I could certainly be missing something. I think that the spreadsheet was derived from the print edition of Fortune, which may have included additional information (I haven't seen it myself). Sorry I can't be of more help in clarifying this.

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