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Boston Bubble Brief: The Real Story for MA - Nov 2007
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PostPosted: Fri Dec 28, 2007 5:23 pm GMT    Post subject: Boston Bubble Brief: The Real Story for MA - Nov 2007 Reply with quote

This is a brief report on what the data for the housing market in Massachusetts looks like in real terms. Market data is typically reported in nominal terms which can be misleading because it combines changes in housing values with changes in the value of the dollar. Correcting for inflation removes changes in the dollar as a factor and gives a more accurate picture of how housing values have changed. This report is based on the published data of the Massachusetts Association of Realtors, though it should be noted that the S&P/Case-Shiller index is a superior data source.

The Massachusetts Association of Realtors released their data for November 2007 on Thursday, December 27th, four days ahead of schedule. While the raw prices were provided in nominal terms, for this report they have been adjusted for inflation using the CPI Northeast Urban numbers available at http://www.bls.gov/cpi/ Adjusting for inflation produced the data represented by the graphs below. Prices for January 2003 and earlier have been estimated by applying the earliest reported median from the MAR, February 2003, against the S&P/Case-Shiller Index for the Boston area. Suggestions for improving this estimate are welcome.

Full Price History




Change in Median Price From One Year Earlier, February 2004 - November 2007

Seasonal variations are removed by comparing prices from the same month in the prior year.



This report marks the introduction of estimates for 2002 prices using the S&P/Case-Shiller Index for Boston in the full price history graph. The result is dramatic, so much so that I initially thought that I probably made an error. The leap from 2002 to 2003 dominates the graph. However, looking at just the S&P/Case-Shiller Index for Boston by itself, 2002 did indeed see a very sharp spike relative to the subsequent years:



(For more information on the above graph, see http://www.bostonbubble.com/forums/viewtopic.php?t=618 )

In fact, it looks like the price rises in the years for which the MAR has published the median (2003 onward) were not nearly as steep as several of the preceding years. In other words, the price history represented by this limited data set does not convey the most explosive portion of the bubble's formation. Even with the declines that have accumulated so far, prices were much lower than peak and current prices, only a few years ago.

Some observations:

  • Current prices are once again lower than in any other year in the time period covered by the MAR, by the largest margin yet.
  • The real decline from November 2006 to November 2007 was an ominous looking 6.66%.
  • Prices are now 18.49% below the peak set in June 2005.
  • The year over year decline fell below the bottom of the normal range in November. This may signal that declines are beginning to deepen, though it is too premature to tell at this point.

As as been the case for at least several months now, The Warren Group reported greater declines than The Massachusetts Association of Realtors. The Warren Group reported a decline of 5.8% in the median price for single family homes with nominal prices falling from $313,000 in November 2006 to $295,000 in November 2007. Adjusted for inflation, that represents a real decline of 9.23%. Given that The MAR reported the November 2007 median as the much higher $330,000, the cumulative discrepancy puts The MAR reported price at a glaring 11.86% above The Warren Group's. A major factor in the discrepancy is that The Warren Group includes foreclosure sales and sales directly by the owner, which The MAR does not cover.

The S&P/Case-Shiller Index for Boston is likely superior to the data from both The Massachusetts Association of Realtors and The Warren Group as it corrects for many flaws that are inherent when only using the median price. The S&P/Case-Shiller Index also has the advantage that futures contracts can be traded against it, thereby offering an unbiased insight into where housing prices are expected to be in the future. It also has more extensive historical data available. The MAR data was used for this report mainly out of inertia and might be replaced with the S&P/Case-Shiller Index in future reports.

As usual, please do try this at home. Double checking of the math used to construct the above graphs and analysis is strongly encouraged in order to help ferret out any errors. The data was derived from the following sources:

The text of this post and the associated graphs are Copyright 2007 by bostonbubble.com with all rights reserved, except as stated here. You may reproduce each graph individually or the text of the entire post as a whole (including graphs) under the Creative Commons Attribution-NoDerivs 2.5 License. You may additionally scale the graphs to fit your work. Alternatively, if you remove the bostonbubble.com signature from the bottom left hand corner of the images within this post, those modified images (and only those modified images) can then be distributed under the Creative Commons Attribution 2.5 License. In all cases, attribution should be made via a hyperlink to http://www.bostonbubble.com/forums/viewtopic.php?t=677 or http://www.bostonbubble.com/ Quoting excerpts of the text is also allowed provided that the quotes would normally fall under fair use. To request other terms for reproduction, please post your request in the original thread at http://www.bostonbubble.com/forums/viewtopic.php?t=677

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PostPosted: Mon Dec 31, 2007 4:38 am GMT    Post subject: Analysis Reply with quote

My analysis: you rock.

Thanks for adding the estimated 2003 and 2002. There's nothing like showing just exactly how many years of 'gains' have been wiped out, in real terms.
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PostPosted: Mon Dec 31, 2007 5:14 pm GMT    Post subject: Reply with quote

Quote:
Posted: Mon Oct 08, 2007 5:29 pm Post subject:

--------------------------------------------------------------------------------

What do you think of this thought:

Do you think that maybe what happened in the early 1990's might have been such that housing might have been cheaper due to the recession and the first portion of the ensuing bubble was actually a price correction. Just like we measure everything from the peak in 2005 (which we all know was too high), is it possible that the early 1990's were too low and again, part of the bubble was bringing the low point up to the normal?



Based on this data, does anyone have any thoughts about the question above?

So this Dec. 6, 2007 BostonBubble Chart of the Real S&P/Case-Shiller Boston... has us at 100. Relative to that 100, and the prior bottom of around 58 in the early to mid 90's; where do you folks see this thing bottoming? Do you think interest rates will need to go back to the rates in the early to mid 90's in order for the bottom to reach that low?
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PostPosted: Mon Dec 31, 2007 5:32 pm GMT    Post subject: Early 90s vs today Reply with quote

I think it is impossible to know where the bottom is for Housing.

But, one thing is clear - both Booms were driven by loose Credit. The late 80s led to the early 1990s Housing Bust and the S&L Crisis.

The S&L Crisis settlement allowed banks to keep even lower reserves and lend even greater volumes of Money - leading to todays Higher prices.

The Securitization (rolling Mortgages into Bonds and selling them to third parties - get them off the Books of Banks and Mortgage Companies) led to loans being offered to folks who can't pay them back.

The Early 90s and today are very similiar - but, the Credit bubble is much bigger in the 2002-2005. When you start hearing people are being denied credit and Mortgages we'll be getting close to a bottom. As long as Credit is accessible the prices can stay on the higher side.
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PostPosted: Mon Dec 31, 2007 5:38 pm GMT    Post subject: Reply with quote

http://upload.wikimedia.org/wikipedia/commons/e/e2/Federal_Funds_Rate_%28effective%29.png
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PostPosted: Mon Dec 31, 2007 5:56 pm GMT    Post subject: Reply with quote

I think some of you folks are afraid to make a call on something. Of course, it is impossible to hit the bulls-eye, but taking all you know at a given point, if you had to say something where do you think it would be?

I think we need to take a temperature reading every now and again because it makes us face up to what weight we are currently giving certain information. I'm curious to what folks have weighing on their minds.

My mind is on globilization (how the LIBOR) is messing up some ARMS. I'm wondering if more money will find its way to emerging markets, weakening the US dollar and calming domestic inflation. If other markets keep the US dollar in check (keeping it from going through the roof), there are fewer risks to long term inflation which would keep long term rates low. The lower the interest rates are relative to historical norms, the longer the houses will remain higher than historical norms.

I see the steam buring off for the ponzi effect that prior trade up buyers had with sizeable down payments from the sale of a condo that almost doubled in value (which current trade-ups and new buyers don't bring to the table). The subprime melt-up is cooling down, but upward pressures exist with pent up demand.

I think we could be close to bottoming. If interest rates drop 1/2 to 3/4 of a point more, I see this market bottoming. It could be mid this year if this happens. I'm saying that the interest rate moves in the next 6 months will determine this. Among this aggregate "bottom", certain price points and locations will feel a more dramatic affect.

My finger is on the pulse of if it is too risky to do business in emerging markets. The potential earning is huge, but if the crazies of the world act up too much to make globalization too risky, people will park their money in the sanctuary of the USA, unless we're overspending like drunken sailors.

The other pulse is of course on the political front: if we elect a socialist, we're in trouble; if we elect a wild card who whispers "sweet nothings" and stirs our emotions like an academy award winner we could be blind sided with incompetence, if we get another cowboy who wants to start another war we could have trouble. If we elect anybody, Republican or Democrat that supports Pay-Go (only spend what you have the money to spend) I see a bright future for us economically.

If you folks think I am weighing too much on one thing or another, please let me know so I can focus more research on what you direct me to. Thanks...
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PostPosted: Mon Dec 31, 2007 7:42 pm GMT    Post subject: Reply with quote

Phil O. Math wrote:
My analysis: you rock.


Thanks. I'm glad you like the new tweaks.

john p wrote:

So this Dec. 6, 2007 BostonBubble Chart of the Real S&P/Case-Shiller Boston... has us at 100. Relative to that 100, and the prior bottom of around 58 in the early to mid 90's; where do you folks see this thing bottoming? Do you think interest rates will need to go back to the rates in the early to mid 90's in order for the bottom to reach that low?

...

I think some of you folks are afraid to make a call on something. Of course, it is impossible to hit the bulls-eye, but taking all you know at a given point, if you had to say something where do you think it would be?

...

If you folks think I am weighing too much on one thing or another, please let me know so I can focus more research on what you direct me to. Thanks...


I think that you are giving too much weight to interest rates. While they are a vital piece of the picture, I don't think that it is sufficient to say that if rates to go to X%, prices will go to $Y. I see three major factors as having created the high bubble prices of the last few years:

  • Abnormally low interest rates
  • Abnormally low credit standards coupled with mortgage "innovations"
  • Bubble psychology. People saw the gains made in the first few years and piled in chasing similar gains, without adequately questioning where the original gains had come from (i.e., low interest rates and credit standards). This created a snowball effect which fed on itself as speculative gains begat more speculators.

The second leg of this stool, the low credit standards, was kicked out at the end of the summer this year. The bubble psychology has started to erode, but I think it still has a long way to go. It is my opinion that these two factors could conspire to bring prices back to the 90's (in real terms) regardless of where interest rates are. I see interest rates as setting a ceiling on prices and other factors as determining how close people are willing to get to that ceiling. Bear in mind that the reversal in the credit market only happened a few months ago and its effect probably hasn't been felt very much yet as this is always the slow time of the year - the upcoming spring season will be very interesting to watch given that it will be the first spring in many years without lax credit.

As for the LIBOR, my hunch is that it may not be what is out of whack - the LIBOR is not necessarily too high, our own Fed rate is too low and foreign rates therefore look high in comparison. I think interest rates are being held artificially low in the US by foreign governments' investment in the dollar and our government's eagerness to exploit that to its fullest.

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PostPosted: Mon Dec 31, 2007 8:34 pm GMT    Post subject: Reply with quote

Ok, you've got me thinking. What you're saying is that things need to follow their gravitational force downward more. You're also saying that the LIBOR is really the lighthouse in the storm.

I need to be convinced of three things to go along.

First, I would totally see that if things went along as they would naturally, you'd be right. I see intervention on the horizon.

My thought is that the FED, like the Boston FED in particular, understood that it was actually lower home prices that was really killing the subprime meltdown. If someone was upside down (short sale), they needed to bring money to closing. If they were upside down on an upwardly mobile market, they could sell for a profit or refinance and grab some "equity". The Boston FED Gov. wanted to lower interest rates 1/2 a point versus the 1/4 point because he knew if people could refinance or if buyers could pay more principal due to interest rates lowering, people could get ouf of their bad situations by selling and not be in a short sale.

My basis is based on Government intervention. I say this because if what most of you folks say is true, we're in for a hell of a economical illness. I don't see financial institutions or governments allowing that without intervention of some sort. I see antibiotics coming into play, although it would be better for things to run their course naturally.

Second, as far as the LIBOR, England and Europe for that matter all share this housing bubble problem. Those folks aren't paying for Iraq, and there is no real threat to them, so they don't have to spend for Military and the US would defend them against anyone else, so this is a golden era economically for them, almost like post WWII was for us. It kind of annoys me a bit because many countries that needle the US are completely protected by our Military, and because we spend so much for defense in our country, they don't and can afford to have much longer vacations and have more socialistic programs. This is why it was so important to get a broad coalition before going into Iraq, so that everyone shared in the costs like the first Gulf War, and instead, everyone will benefit from a stable world, but why would anyone volunteer to spend blood or treasure if we will go alone and pick up the tab? I think that the banking industry led by elites understand that the cost of doing business is having a strong military and if we get our fianancial house in order discipline-wise (your second leg of the stool analogy), they will not tax the American people because it would be very unwise to do so. Sometimes the law of the jungle is true, an 8,000 lb gorilla eats whatever they want. The elites know this and won't want to mix it up with our people.

Third, who is going to be shaken from the tree? In the 90's we had a pretty pronounced recession. If people have financial stability and can make their mortgage payments and we don't have serious job losses, who is going to be forced to sell other than subprime or those in ARMS?

My feeling is that the majority of people are in the risk category for the first five years of home ownership or within 5 years of a full value refinance (buying your home from yourself kind of thing). Out of 100 purchases or refinances, what number do you think are in "risky waters" now. Also, out of 100 households in Massachusetts, how many households could be directly impacted from an affordability standpoint (meaning they can't afford their mortgages)? There is a chance, I am underestimating this count. I think as long as people still have their jobs and can make their mortgages, it may be lean, but fewer will be forced to sell and will be able to ride this out.

I think that the degree of intervention will depend on how many families get blown away with this economic storm.

I think I'm kind of stuck on the interest rates because it is a mechanism that can be used to dampen the affect of home prices and I think that lever will be pulled because if it isn't the spillover can magnify and we're in store for a lot worse, so although people do need a slap on the wrist, they might not get it because the intervention.

I have never found myself so in the minority of opinion, so thanks for the input...
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PostPosted: Mon Dec 31, 2007 9:05 pm GMT    Post subject: Reply with quote

john p wrote:
Ok, you've got me thinking. What you're saying is that things need to follow their gravitational force downward more. You're also saying that the LIBOR is really the lighthouse in the storm.


I have to think about the rest of your post some more, but I wanted to clarify my reference to the LIBOR. I'm not saying that it is the lighthouse - perhaps it is a lighthouse, as other foreign rates may be as well, but I don't follow the British economy enough to know with any certainty either. What I am saying is that the Fed's rate is artificially depressed and so when foreign rates look high, that may just be an illusion.

I think the same perspective could be applied to the Boston Fed's position, which you referred to, of falling prices supposedly being the problem. They claim that it is the falling prices now which are causing the subprime mess. However, prices are only lower when compared to very recent, unprecedented, extreme highs. Compared to just a few years ago, prices are still much higher, even in real terms. They are casting the comparison with the intent of passing the extreme as the new norm.

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PostPosted: Mon Dec 31, 2007 9:07 pm GMT    Post subject: Intervention leads to higher Inflation Reply with quote

John,

You are right the Fed will try to intervene. But, intervention means the Feds create more Money - this reduces the buying power of an individual dollar.

Inflation will eat up the American Consumer. Remember, many of the Dollars that drove Real Estate to were from Foreign Investors buying Mortgage Backed Securities. The Sub-Prime/Credit Crisis has scared all the smart money out of that Mortgage Backed Security Market. Merrill Lynch and Citi Bank are the most notable companies who have been crushed by holding MB Securities. If you remove this fuel from the Mortgage/Real Estate it will have to be replaced with a Federal bailout or other interventions.

Again, the Feds are in a bind - if they provide Cash(liquidity) to save Real Estate then the US Dollar will tank even more- and Treasuries will tank. This Will force the Fed to raise interest rates - to attract foreign investors to the Dollar and that will kill the Mortgage Market.

How does someone save for a Down payment when they are seeing the cost of Fuel, food, Health care, and property taxes are all going up?

I can't imagine a Scenario where Real Estate goes up? If it goes up because of the Feds intervening then the Dollar gets crushed - Precious Metals, Commodities will go to the Moon - and Inflation will be raging inside the USA.
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PostPosted: Mon Dec 31, 2007 9:40 pm GMT    Post subject: Reply with quote

Feedback is appreciated.

Who do you think will sell for a serious loss? If people foreclose and the houses get auctioned, won't banks want to get most of their money back?

Playing out that scenario in your mind, cascading prices; why would the banks allow that?

I think you folks are right about lending standards going to a more realistic basis. I think the intervention will provide an escape route for those upside down and the higher standards will keep those out of homes they couldn't afford in the first place.

I think at the entry level there will be a lot better value, but it might be in harder hit neighborhoods.

I see things staying flat for a while with maybe a slight uptick if we get the intervention I predict. If you can't afford right now, in a few years you'll have a much better chance.

I kind of think Europe and the US are kind of in the same boat with the housing bubble.

One thing about inflation. Inflation bailed out a lot of babyboomers. Think about how little people bought their houses for in the 70's. Their mortgage is lower than their cable bill. Inflation lowers the value of the dollar. If you owe hundreds of thousands of dollars and the dollar weakens, your debt value does as well. Eventually, you will get wage inflation. What we need is a bubble in wage inflation to catch up with the global product inflation (gasoline, oil).

I predict flat home prices with salary inflation like we got in the late 1990's, early 2000's.
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PostPosted: Mon Dec 31, 2007 9:49 pm GMT    Post subject: Reply with quote

john p wrote:

Who do you think will sell for a serious loss? If people foreclose and the houses get auctioned, won't banks want to get most of their money back?

Playing out that scenario in your mind, cascading prices; why would the banks allow that?


What alternative does the bank have to selling at a steep loss if people are unwilling to buy otherwise?

Also, it is not necessary for there to be people selling at steep losses for prices to decline steeply. People who bought before the bubble could sell below current prices and still realize nice gains. I don't know what percentage of people bought before the bubble as opposed to during, but I would guess it is the majority of owners given the compressed time frame of this particular bubble.

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PostPosted: Tue Jan 01, 2008 12:08 am GMT    Post subject: Reply with quote

regarding bank's alternatives:

The banks make the rules they don't have to take a bite out of the turd sandwich if they don't want to. They make joe six-pack eat as much of it as possible until they get fed up enough to elect a socialist. They make the rules, if it is in their best long term interest to let house prices drop, they will, if not, they will lower rates to prop up prices.

I think they will ratchet the correction down, kind of tinker with rates on one hand and lending criteria on the other. I am not sure if the weight is too much torque for the wrench to handle.

One other report I read recently said that banks don't want foreclosures because when you track who actually holds the mortgage, I read that the person holding it, upside down, can get out of the agreement if the deal wasn't done properly and there was fraud. This could be an ugly nightmare for banks.

My analysis is a bit dialectic, always comparing alternatives available to each person and their given position. What do you think the best alternative for banks is? Keep in mind, the stock market doesn't write the lending policy; there is no Federal Reserve type of entity to protect equities other than a few circut breaker rules and SEC stuff. The FED can write the rules to suit the interest of banks plain and simple; they have the power. Make no mistake, they will try to make joe six-pack eat the turd sandwich if they can get away with it. What I am afraid of is a Barack Obama who on the one hand prides himself on not voting for the War in Iraq, but voted to make Condelezza Rice the Secretary of State (one of the key people to pitch the War). During the hearing to approve her, he was such a little baby with his questions; if he had hard core opposition to the War he did not have any grit during those hearings. I can see this inexperienced guy being all flowery and dumb with the FED like Deval Patrick was with Ameriquest. That's the saddest part of many "Men of the People". Often times they appear to be well intended, but in reality are dumb and inexperienced.

As far as the older folks selling to new buyers. Sure, I have always advised a younger buyer to target those sellers who can afford to sell lower than market rates, but think about their alternatives. If they want to sell fine, where do they move? I think that some of the retirement areas like Florida are dropping more than Massachusetts, so retired people can offer a large discount to get a better discount in Florida. I think that more and more people are working longer due to rising cost of living costs. The downside for retired people to sell is interest rates. If they have a low cost of capital, like say 5% on a small amount, why do they need to sell at all? If they can get a palace in another area for the sale of their current home, they'll jump. That's why I'm trying to weigh whether or not retiring here makes sense.

Alan Greenspan on the one hand thinks he's a Republican, but had his best days during Clinton and thought Clinton was the one of the smartest he knew. Republicans have had to feed the red meat to the war mongering segment which costs money which turns off the isolationist, frugal libertarians. I think if people get over their fear of McCain's potential temper and possible trauma he might have gotten in the bamboo prison and that bringing about a nuclear war, they might get someone who will cut the pork out of government. Greenspan begged for Pay-Go. My biggest concern regarding the housing is the banking industry's reaction to the politicians we choose. I think the weakness in politicians are part of the reason why money is moving away from the US. It is our poor judgment to select leaders, which leads to poor decisions and waste. Think about it, for Dem's we have a choice between a socialist, an ambulance chaser, and someone who is completely inexperienced. The Republicans have someone who wants to be Pastor in Chief, a weep-a-lot CEO in Chief, the 9/11 in every sentence candidate, and the ex-actor who played a president on t.v. There is like 3 million of us here in the US, is this really the best we can come up with? We really need competence right now and confidence in our leadership to help support investment in the United States.

If we lose our superpower status economically it is because people have lost faith in the common sense and judgment in the American people. You know, I hate elitists, but if the electorate act like morons, it almost makes me feel better to know that there are some adults behind the scenes pulling the strings. This of course has a whole other can of problems associated with it, but considering alternatives, a president that sits in a room and fills in coloring books for 4 years while we can find a deserving candidate might be the right medicine. If Deval Patrick did coloring books he would have done less damage than his hairbrained attempts this far...

Sorry for the rant. I want really bad for the younger generation to not get it on the chin with this, but the best case scenario is a dip in housing prices not a plunge, because along with a plunge is a depression and you won't get the job experience or anything at all if that happens...
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PostPosted: Tue Jan 01, 2008 1:01 am GMT    Post subject: Decrease in Home Prices Real vs. Nominal Reply with quote

If a Home was worth $500,000 and it is still worth $500,000 in 2007 - the price of the home is down due to inflation.

If this money had been invested it would have generated 7-15% per year - depending on the risk exposure. Commodities, Food, and Health Care have increased while the cost of the home has stayed the same.

The Value of the Home is going down - because the 500,000 dollars that it is worth can buy fewer and fewer goods (less gas for the car and fewer eggs for breakfast).

If the Fed continues to lower interest rates and flood the financial markets with money the value of the home will stay at $500,00 or less. Meanwhile lots of other investments will surge in value. The cost of fuel, food, health care, and taxes will rise with inflation.

The family that lives in this home is losing money on this investment. The longer they wait to sell - the $500,000 will buy fewer and fewer other things.

If the family sold in 2005 for $500,000. Lets assume that they Bank $250,000 in Cash (Real Equity). If this money is invested and ONLY grows by 7% per year - it will grow to $1 Million in Ten years.

Meanwhile, the family by staying in the home sees there Real Estate property taxes increase, repair costs increase with inflation. This family has a hard time saving for their future because the cost of maintaining their home and living is going up-up-up.

In Ten years the family finally sells the home and housing has stayed flat for ten years and their nest egg is worth $500,000.
-The other family has at least $1,000,000 or more for a nest egg because they sold at the beginning of the inflation boom and flat housing.

So, maybe Property values stay flat - this is not good for the home owner. But , the Fed realizes that most folks don't understand money and will be happy with Flat Home prices.
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PostPosted: Tue Jan 01, 2008 4:57 pm GMT    Post subject: Reply with quote

The ability to make the rules is insufficient. I don't see a practical mechanism whereby the banks could prevent real price declines. The best they could do is engineer inflation to blunt nominal price declines, and I don't know why they would want that. BK did a good job of explaining how inflation affects consumers, but it affects companies as well, banks included.

Also, any market manipulation, including engineered inflation, would take awhile to ripple through to the unsold homes. Banks would be responsible for the carrying costs in the meantime (property taxes, maintenance, insurance), and the banks investors' will not be pleased with non-performing assets on their books. Unlike most individuals, banks are unemotional and a lot less likely to succumb to the sunk cost fallacy - the money is already lost in real terms and they will sell for what they can get.

This may all be an academic argument, in the end. Banks don't hold many of the more recent mortgages, at least not directly. They have been sliced, diced, repackaged, and sold to Wall Street. This is part of the problem - nobody seems to know who is holding the bag.

As for pre-bubble buyers looking to sell and why they would want to do that, I don't think that the reasons will be any different than usual. There will be sales due to divorce, job relocation, estate sales, and the like. Time is more important than profit maximization in many of these cases, and pre-bubble buyers could price their homes aggressively without taking a loss. (And those familiar with the sunk cost fallacy may even take a loss - I would and have in other situations.)

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