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What Caused the Housing Bubble?

(2009-07-07 17:12:51) 下一個

Ed Glaeser says that if people were as smart as he is, they would have realized housing price increases were unsustainable and there wouldn't have been a housing bubble:

In Housing, Even Hindsight Isn’t 20-20, by Edward L. Glaeser: ...[Is] the housing market ... starting to hit bottom? ... One major point of economics is that predicting asset prices is extremely hard... Moreover, the last seven years should make everyone wary about predicting housing price changes. ...

The housing price volatility of the last six years has been so extreme that it confounds conventional economic explanations. Over a four-year period — from February 2002 to February 2006 — the Case-Shiller index increased ... about 50 percent in constant dollars.

Certainly, those price increases cannot be explained by increases in average income. Income growth was quite modest from 2002 to 2006. Nor can the boom be explained by a dearth of new housing supply. Construction rose dramatically during the boom...

A number of pundits place the blame for the bubble on ... Alan Greenspan. They argue that loose monetary policy caused housing prices to rise. While lower interest rates are correlated with higher prices, the relationship is far too weak to explain the price explosion that America experienced. ... To get a 50 percent real increase in housing prices, real interest rates would have had to decline by more than ...10 percentage points..., which is not what happened. ... Real rates actually rose slightly between 2002 and 2006.

While low interest rates, on their own, cannot make sense of the bubble, perhaps the increased availability of credit to subprime borrowers has more explanatory power. ... Yet the correlation between housing price growth and subprime lending across markets is as likely to indicate that lenders took more risks in booming markets as that those risks caused markets to boom. ...

The most plausible explanations of the bubble require levels of irrationality that are difficult for economists either to accept or explain.

For many years, the creators of the housing index, Chip Case and Robert Shiller, have argued that housing bubbles were fueled by irrationally optimistic beliefs about future housing price appreciation. More recently, Monika Piazzesi and Martin Schneider have documented the rise in optimistic beliefs about housing price appreciation over the recent boom. Using some elegant algebra, they suggest that overly optimistic beliefs could cause a boom even if those beliefs were held by only a small share of the population.

It is hard to argue with this view. The only way that anyone could justify spending bubble-level prices in Las Vegas was by having the incorrect belief that those prices would increase.

I once thought that the Las Vegas housing market was so straightforward (vast amounts of land, no significant regulation) that no one could be deluded into thinking that prices could long diverge from construction costs, but I was wrong. I underestimated the human capacity to think rosy thoughts about the value of a house.

Yet even if ridiculously rosy beliefs are a major part of bubbles, we cannot say that we understand those bubbles until we understand the sources of such beliefs. Economists like to link beliefs to reality, but these views weren’t grounded in sound statistics. The housing boom was a great wildfire that spread from market to market, but it is hard to make sense of its flames. ...

I don't think people believed that housing prices would never, ever go down, what they thought is that housing prices would go up in real terms, on average, over time - that housing was a good long-run investment. They knew there would be variation around that trend, but they expected the variation to be relatively mild, they didn't expect the severe variation in prices and associated problems that actually occurred.

But as Shiller argues, the belief that real housing prices rise over time is false, the evidence suggests that real housing prices are relatively flat over the long-run. Because people expected prices to rise on average when they should have expected them to remain flat, the correction - the variation in prices - was far larger than anticipated and many homeowners weren't able to simply ride out the short-run variation like they thought they would be able to do.

But this still leaves a question unanswered. Why did people have this false belief about the long-run trajectory of prices? Shiller explains that this happened because people believed that both land and building materials were becoming relatively more scarce over time, a belief he says is false, but that just pushes the "but why did they believe that" question back one step from housing prices to the prices of land and raw materials.

So let me take a quick stab at an explanation (I'm not pushing this, it's just a quick thought). People are told (or were at that time) that stock markets are a great long-run investment. If you have the time to ride out the short-run fluctuations you can earn 8% per year. Just dump your money in an index fund that duplicates the market portfolio, and forget about it until many, many years later and you will do fine. Risk adjusted real returns on assets ought to equalize across markets through arbitrage, so shouldn't housing yield a real return similar to stocks (adjusting for risk)? Shouldn't there be a real return on housing just like in stock and other asset markets, and if so, doesn't that mean real prices will rise on average over time? This still requires beliefs about long-run prices at odds with (Shiller's) evidence though.

One more note. I may be wrong to assert that people thought that housing prices would rise forever. If you know that there is a bubble in an asset market, but you believe you can sell fast enough once the market hits a turning point to still make a profit, or at least not lose much in any case, then you may be willing to make an investment that tries to exploit the short-term surge in prices. But while I think that may apply to stock markets, or other markets where assets can be sold quickly (the belief that is, the reality is quite different when everybody tries to sell at once), I'm not sure this applies to housing where sales can be notoriously slow. But it's still possible that people would know there is a bubble in housing prices, but still be willing to make an investment because they believe that housing prices would fall so slowly that, if necessary, they could sell their house before taking a loss. It just doesn't seem to me that this explanation works as well in housing as it does in stock markets.

    Posted by Mark Thoma on Tuesday, July 7, 2009 at 11:29 AM in Economics, Financial System, Housing  Permalink  TrackBack (0)  Comments (26)



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    Bruce Wilder says...

    Atrios draws attention today to the Vanity Fair piece by Michael Lewis.

    http://www.vanityfair.com/politics/features/2009/08/aig200908?currentPage=5

    The psychology of the housing market was just an effect of what was going on in finance.

    Subprime lending -- and Alt-A lending was driven by a breakdown on Wall Street and a breakdown among the mortgage aggregators. The underwriting of mortgages had been corrupted.

    That wasn't psychology, that was real money.

    Here's what Atrios was quoting from Michael Lewis:

    "A.I.G. F.P.’s willingness to assume the vast majority of the risk of all the subprime-mortgage bonds created in 2004 and 2005 had created a machine that depended for its fuel on subprime-mortgage loans. “I’m convinced that our input into the system led to a substantial portion of the increase in housing prices in the U.S. We facilitated a trillion dollars in mortgages,” says one trader. “Just us.” Every firm on Wall Street was making fantastic sums of money from this machine, but for the machine to keep running the Wall Street firms needed someone to take the risk. When Gene Park informed them that A.I.G. F.P. would no longer do so—Hello, my name is Gene Park and I’m closing down your business—he became the most hated man on Wall Street.

    "The big Wall Street firms solved the problem by taking the risk themselves. The hundreds of billions of dollars in subprime losses suffered by Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns, and the others were hundreds of billions in losses that might otherwise have been suffered by A.I.G. F.P. Unwilling to take the risk of subprime-mortgage bonds in 2004 and 2005, the Wall Street firms swallowed the risk in 2006 and 2007. Lending standards had fallen, property values had risen, and the more recent loans were thus far riskier than the earlier ones, but still they gobbled them up—for if they didn’t, the machine would have ceased to function. The people inside the big Wall Street firms who ran the machine had made so much money for their firms that they were now, in effect, in charge. And they had no interest in anything but keeping it running. A.I.G. F.P. wasn’t an aberration; what happened at A.I.G. F.P. could have happened anywhere on Wall Street … and did."


    I'm less concerned about the psychology supposedly infecting prospective home buyers circa 2004 or 2005, than I am in the psychology that stops people from recognizing that Bear,Stearns and AIG and Angelo Mozilo of Countrywide, and Phil Gramm, Senator from Union Bank of Switzerland, and a bunch of other bad actors in a financial system in extreme entropy, might have had something to do with it.

    When economists think about economic dysfunction in markets, is there some rule against hypothesizing cheating and stealing?

    Posted by: Bruce Wilder | Link to comment | Jul 07, 2009 at 12:15 PM

    anony says...

    We put our house on the market right when things hit the fan, and it wouldn't move. Not at that price anyway. I think the point at the end about the illiquid nature of the asset is important, b/c even if you're thinking you can get away from this thing, how sticky are these prices in people's minds? In our case, very. We held on to it way too long and took a small bath - even rejected an identical offer from a year earlier that was ultimately the price we accepted. These assets move slowly, but mainly because of the mental menu costs I think.

    Posted by: anony | Link to comment | Jul 07, 2009 at 12:15 PM

    Beezer says...

    I posted this at the NYT site, but I added the last here.

    Low interest rates combined with the bank balance sheet liquidity driven by securitization may explain much of this boom.

    Not for nothing, Greenspan sold a lot of treasuries and with the demand for strong credits, he could sell them real cheap. Why boost rates and pay more than you need to?

    Derivatives were a response to low rates for savers. They offered security, regular income and paid more. Or at least that was the sales pitch. Not correct as it turned out, but investment bankers have been known to fudge the truth a bit.

    Anyway, local originators had no problem selling into securitization, getting the funds and then repeating. It was cheap money and that fueled rising prices. Most home buyers had no clue why things were going up, they just were. And if they didn’t know that already, the realtor made sure they did.

    Worked just fine until it didn’t.

    Interestingly, the health care system bubble participants display the same characteristics as were shown by the financial bubble participants.

    Basically it's this: "Hey, stop complaining, we're making boucoup here."

    Deficit bubble or asset bubble, a burst in either one has the same net effect: Recession or worse.

    This time Obama has to keep complaining that this bubble is not sustainable. And he has to keep complaining until either the trend is reversed, or the public takes the current participants out to the woodshed: Some of them not to return.

    Those would be doctors, lawyers, big pharma and big health insurance companies. That's the list. Round them up, Mr. President.

    Posted by: Beezer | Link to comment | Jul 07, 2009 at 12:16 PM

    OrganicGeorge says...

    Let me take a quick stab at this economic discussion.

    The thieves on Wall St, pushed the scum at the mortgage companies, to push more people into houses they could not afford, so the Bankserts could reap huge bonuses selling securitized crap to each other and their customers.

    The public was just caught up in the maelstrom of paper profits in their home equity, which they borrowed against or leveraged up to buy more houses.

    Any economist trying to blame this on the unsophisticated public is fronting for the banks or doing some serious CYA.

    Posted by: OrganicGeorge | Link to comment | Jul 07, 2009 at 12:17 PM

    chrismealy says...

    Real stock market returns are closer to 5% to 7%, before taxes and fees.

    Posted by: chrismealy | Link to comment | Jul 07, 2009 at 12:25 PM

    icedtea1954 says...

    Another part of the equation has to be the unique nature of housing compared to other investments.

    1. No one has to invest in the stock market. But everyone has to spend money on housing.

    2. Housing is highly leveraged, and became much more so in the last 10 years. Where else can the least sophisticated investor invest at a 20-to-1 leverage ratio?

    3. In most of the U.S., renting a house is not an equivalent to buying one. Buying a house (or condo) provides:

    a. A better quality of house, of neighborhood, and of schools.
    b. The ability to remain in one location for a long time.

    In 2003, I was following Prof. Schiller closely, and definitely believed we were heading for a housing crash (though obviously I had no idea when it would occur). But I bought a house (in upstate NY) anyway. Why? Well, the alternative was a rental, which meant a much lower quality of life for my children.

    Posted by: icedtea1954 | Link to comment | Jul 07, 2009 at 12:33 PM

    bakho says...

    I think Bruce WIlder nails it:

    "When economists think about economic dysfunction in markets, is there some rule against hypothesizing cheating and stealing?"

    Mark should have quit while he was still ahead:

    "I don't think people believed that housing prices would never, ever go down, what they thought is that housing prices would go up in real terms, on average, over time - that housing was a good long-run investment. They knew there would be variation around that trend, but they expected the variation to be relatively mild, they didn't expect the severe variation in prices and associated problems that actually occurred."

    NEVER underestimate the gullibility of the American consumer. Buying and selling houses is NOT something most Americans do everyday.

    WTF do most people really know about housing and house prices other than what some realtor or loan officer tells them? Most people ASSUME that if the bank is willing to lend them money, they MUST be able to afford the house. ALL the incentive was on the side of making the loan. There was always someone willing to say yes.

    The other psychology is watching home prices skyrocket and thinking that if I don't get on board now, I might be priced out of the market.

    Or as Krugman puts it, "Rational investors, according to the theory, should treat bygones as bygones: if last year your neighbor made a lot of money in stocks while you unfortunately stayed in cash, that's no reason to get into stocks now. But suppose that, for whatever reason, the market goes up month after month; your MBA-honed intellect may say "Gosh, those P/Es look pretty unreasonable", but your prehistoric programming is shrieking "Me want mammoth meat!" - and those instincts are hard to deny.

    And those instincts can be self-reinforcing, at least for a while. After all, whereas an increase in the number of people acting like Cave Bulls tended to mean fewer mammoths per hunter, an increase in the number of modern bulls tends to produce even bigger capital gains - as long as the run lasts. Any broker can tell you that in the last few months the market has been rising, despite mediocre earnings news, because of fresh purchases by ever more people distraught about having missed out on previous gains and desperate to get in on the action. Sooner or later the supply of such people will run out; then what? "

    http://www.pkarchive.org/theory/iceage.html

    Posted by: bakho | Link to comment | Jul 07, 2009 at 12:41 PM

    Moopheus says...

    "But while I think that may apply to stock markets, or other markets where assets can be sold quickly (the belief that is, the reality is quite different when everybody tries to sell at once), I'm not sure this applies to housing where sales can be notoriously slow"

    This may be true in normal times, but at the height of the bubble crazy it was possible to flip a house very fast. You could buy a house, put some pergraniteel in it, and get it back on the market in a few weeks, sell it almost immediately. Yes, it was risky, and you could easily get into a bad situation, but people were doing it. And the bubble went on long enough for people to do the "live-in" flip--stay in the house for two years, and sell at a profit, tax-free (on the first $500K). Thanks, tax code! As long as there was another round of suckers who could get some kind of funding, the game could go on.

    "The most plausible explanations of the bubble require levels of irrationality that are difficult for economists either to accept or explain. "

    Why is this hard for economists? Did they never watch HGTV? See the ads for Ditech? Read the news? Are economists really so clueless about what actually happens out in the real world?

    Posted by: Moopheus | Link to comment | Jul 07, 2009 at 12:47 PM

    JG says...

    "Why did people have this false belief about the long-run trajectory of prices?"

    People tend to seek "expert advice" when making a significant purchase, and a home is certainly a significant purchase for most. Real estate agents represent themselves as experts in property, and indeed are the most knowledgeable among the general population and the only real estate "experts" a buyer or seller is ever likely to meet. Unfortunately, they have an even stronger bias to promote a property as a "buy" than a typical sell-side securities analyst, as their whole livelihood is dependent upon their client buying or a prospective seller believing that their pre-marketing "appraisal" is indicative of the likely realized price. Buyers and sellers may be distrustful of an individual's motivations, but really only engage one among many with a consistent point of view. Every encounter in any venue with such an expert consistently reinforces this optimistic point of view. Has anyone ever been advised by a Realtor to rent and give the market a few months let alone a couple years to settle before buying? Even if not a client or likely prospective client of one of these professionals, a homeowner or would-be homeowner will always hear the same message when hearing one of these self-professed - and often self-deluded - experts opine. Think of the projections the NAR economist has offered over the years. But you can't blame them, that's their job...

    Posted by: JG | Link to comment | Jul 07, 2009 at 12:52 PM

    mark says...

    Drawing on a theme that came out of the Polanyi post, human interaction is complex and generalizations fail. When you write (or Glaeser writes) "people believed" or "people thought" and follow that with a single proposition, it is sure to be an overgeneralization. The real answer lies in a grouping of factors, ranging from massive government subsidies in the form of taxes and government guarantees, to the political popularity of the only industry in America that was able to generate employment for undereducated males once globalization began destroying our high cost manufacturing base, to the misaligned compensation practices throughout the financial industry that reward people for creating debt, to demographic factors, to technological changes that dramatically changed the housing finance underwriting practice, to securitization that separated debt creator from debt holder, to Alan Greenspan's post-dotcom/ 9-11 monetary decisions, to political competition for votes by pushing lowered underwriting standards as a quid pro quo for other favors, to portfolio theory as applied to MBS and I am sure there are more but I don't want to be a blog hog.

    Posted by: mark | Link to comment | Jul 07, 2009 at 12:52 PM

    Robbie says...

    "But this still leaves a question unanswered. Why did people have this false belief about the long-run trajectory of prices? Shiller explains that this happened because people believed that both land and building materials were becoming relatively more scarce over time, a belief he says is false, but that just pushes the "but why did they believe that" question back one step from housing prices to the prices of land and raw materials."

    California is the place you ought to be....So they loaded up the truck and moved to Beverly...

    For years, we allowed a few states to absorb the loss of population from a lot of other states. California did not always have 55 electoral votes. So while, in my life time, a few states have had a bubble brewing with people running from the rust-belt to sun-belt in search of jobs and no snow.

    Posted by: Robbie | Link to comment | Jul 07, 2009 at 01:00 PM

    Beezer says...

    Mark, that's a pretty good list.

    Was "Dude, money's for nothing and the chick's are free!" in there somewhere?

    Oh yeah, I spotted it in "misaligned compensation..."

    Posted by: Beezer | Link to comment | Jul 07, 2009 at 01:03 PM

    bakho says...

    I wonder who does Glaeser's Wikipedia site?

    A number of pundits and commentators attribute skyrocketing housing prices to a housing bubble created by the monetary policies of Alan Greenspan. Glaeser points out that the increase in housing prices has not been uniform throughout the country. In fact, the most dramatic increases have occurred in places like Boston, Massachusetts and San Francisco, California, where permits for new buildings have been difficult to obtain since the 1970s. This, compounded with strict zoning laws, seriously disrupted the supply of new housing in these cities. Real estate markets were thus unable to accommodate increases in demand, and housing prices skyrocketed."

    http://en.wikipedia.org/wiki/Edward_Glaeser

    No bubble here.......

    Posted by: bakho | Link to comment | Jul 07, 2009 at 01:05 PM

    swag says...

    Does anybody remember not so long ago when Robert Kiyosaki's "Rich Dad, Poor Dad," a book that pretty much told people to go flip houses to get rich, was number one on the business/finance best-seller lists for years on end?

    I don't think Robert Kiyosaki gets enough credit for the housing bubble.

    Posted by: swag | Link to comment | Jul 07, 2009 at 01:12 PM

    pete muldoon says...

    Housing prices

    In a post on Economist"s View, Mark Thoma discusses the widespread belief that housing prices will rise long-term, versus evidence that shows that this may not be true. Since I think many people would dismiss this evidence, I'd like to take a quick look at why this might be the case.

    I'd start by asking why we would assume that a class of assets would appreciate over time. In order for this to happen, we would need the supply of them to decrease, or demand to increase, or both.

    It occurred to me that it might be helpful to list the reasons that home prices might increase, as well as the reasons that they might decrease. Feel free to add to the list in the comment section.

    Reasons for price increases:

    1. The supply of homes on the market decreases, resulting in competition among buyers and a bidding up of prices.

    I can see no reason why this would result in a long-term increase in prices, as the market would presumably respond by increasing the supply until the prices return to an equilibrium. Unless

    2. There is a limited supply of new homes.

    While in certain localized areas (Jackson Hole, where I live, for example), there is a limited amount of land available for new homes, overall, there is no reason to believe that we are on the verge of running out of room in the foreseeable future. Of course, if people believe that we will run out of room, this could certainly impact prices. But I don't think that it would impact them in the long-term, as market corrections would tend to make people recognize the reality.

    3. There is a demand for bigger and more expensive homes.

    If the trend is to buy more expensive homes, then the average price of all homes will increase. This could result in long-term price increases, but only if it's sustainable- in other words, only if consumer preferences stay the same and income levels remain sufficient to pay for them. If every homeowner believes that they need to buy a 6000 square ft home with a pool, then prices will increase.

    4. New regulations, commodity, or labor increases increase the cost of building a new home.

    This is certainly possible, although it cuts both ways. Builders are getting more efficient at building, as well.

    Here are some reasons prices could or should fall.

    1. A home should depreciate in value.

    A 30 year old home should not be worth more than a new one, if for no other reason than wear and tear. It should be worth less, unless there is a greater increase in value due to one of the reasons above. So we should start with this premise. Every day, your home should be worth less, and you need an increase in value due to demand or supply changes just to keep up.

    2. Homes become less expensive to build.

    If builders become more efficient at building homes, and labor, material, and regulatory costs decrease or stay the same, homes could easily become less expensive to build. So the house that cost $300,000 to build 2 years ago now only cost $200,000. This could result in sustainable downward pressure on prices. As someone who has personally helped build a house, I can attest to that fact that technological advances are making home-building less costly.

    If you think this is not possible, look at the recent prices decreases in computers, for example, or HDTV's. Increases in efficiency will be long-term. How much do you think that state of the art desktop you bought 5 years ago is worth today, even if it's never been used?

    3. There could simply be a long-term trend away from preferences for expensive homes.

    I think that this is not only possible, but likely. While we may not see large-scale use of microhomes anytime soon, it's very likely that consumers will start to see the folly in wasting money on homes that are mostly for show and inconvenient and costly to live in. If this happens, then the prices on these large homes will continue to drop. The impact of changing attitudes towards environmental issues could devastate the market for large homes.

    4. Demand could drop overall. There is no reason that population increases, which drive demand, will increase forever. Population growth rates are already negative in many European countries, and this is a trend that could easily affect us as well.

    Taken together, it looks at first glance as though there are plenty of reasons for short-term gains in housing prices, but even more reasons for long-term decreases.

    I think we need to stop looking at homes as investments. They generally do not produce marginal wealth. You can invest in a building that will be used as a factory, for example. But you purchase a home. Fundamentally, it's no different than buying a car or a computer or a boat, except that you pay for it over a much longer period of time. During bubbles, people have a tendency to look at these sorts of assets as investments. But they really are not. And this is a critical point that many people fail to see.

    Having said all that, I think I should put my money where my mouth is and get my house listed.

    Posted by: pete muldoon | Link to comment | Jul 07, 2009 at 01:19 PM

    JeffF says...

    Glaeser's wikipedia page says:
    "Glaeser also points to the experience of states such as Arizona and Texas, which experienced tremendous growth in demand for real estate during the same period but, thanks to looser regulations and the comparative ease of obtaining new building permits, did not witness abnormal increases in housing prices."

    Arizona huh.

    Phoenix Arizona is one of the top bubble bust cities. It has actually had worse stats than LA and SF, at least at some points in time.

    Maybe he should just point to Texas?

    I think the psychology of home buying is a lot different than stock buying for most people. People want to own a home. Not many people want to own stock. Therefore there is the fear of being "priced out forever" when home prices are rising, on top of the fear of missing a windfall. It took a bit of fortitude to not buy a house in 2004-2006 if you were at a stage in life where you are expected to do so, let alone to sell one before the bubble pop.

    California's property tax system exacerbates this fear.

    Posted by: JeffF | Link to comment | Jul 07, 2009 at 01:30 PM

    Bruce Wilder says...

    swag: "Does anybody remember . . . a book that pretty much told people to go flip houses to get rich"?


    I have a friend, who rationalizes not taking romantic chances, on the grounds that she wants "something that will last." I tell her, she's not going to last.

    Flipping houses worked well for a lot of people, for a fairly long time. That was an effect, not a cause.

    Posted by: Bruce Wilder | Link to comment | Jul 07, 2009 at 02:04 PM

    Real Estate Genius says...

    It really wasn't a housing bubble.....

    It was a "Real Estate Genius" bubble..... In the first quarter of 2006, everybody I knew was a real estate genius.

    Hey, didn't someone write a book about Greenspan and title it "MAESTRO"....?

    Best regards,

    Econolicious

    Posted by: Real Estate Genius | Link to comment | Jul 07, 2009 at 02:16 PM

    Mattyoung says...

    Bureau of Census data put the unsold inventory at 700,000; or about 16 months supply. Using $150,000 per unit, this comes to $110 billion in too many houses, much less than 1% of the economy. (Is my math right?).

    Having watched the housing industry and taken the class, I can say that tract building, building huge developments gets you a 20% gain in efficiency over fill-in style building of a few units at a time, a gain of $20 billion over the whole inventory, leaving a net overhang of $90 billion.

    I see that number as in the noise, nor do I see this bubble as being a big driver of the depression, even including the wealth effect. And bankers would have to be awfully stupid to lose trillions in assets because of a $90 billion dollar overhang inn housing.

    The three or higher trillion dollar change in housing wealth occurred over a four year period and including most houses neither bought nor sold; though some had equity lines of credit.

    Posted by: Mattyoung | Link to comment | Jul 07, 2009 at 02:25 PM

    Beezer says...

    MT says:
    "Shouldn't there be a real return on housing just like in stock and other asset markets, and if so, doesn't that mean real prices will rise on average over time? This still requires beliefs about long-run prices at odds with (Shiller's) evidence though."

    I think this observation is pertinent. First, most folks think of a house as a home and wouldn't know Shiller from a Schlitz. The comparison being made is most often between the home and an apartment.
    Buyers see the rent paymens as "lost money." Most purchases are considered long term. Also, there's the tax deduction which over time builds up equity, even if the house price doesn't increase in price. It's looked at as tax advantaged savings.

    Also, there's the issue of inflation. Home prices, property prices in general, normally match real inflation rates which are higher than official ones.

    The folks most closely tuned into pricing are local realtors and, say what one will about professionalism, realtors are in the business of selling property.

    Tops are marked by speculative activity. The presence of flipping as though a mortgage was another stock, was a sure tell a top was near.

    The Alt A, liar's loans, subprime in general were icing on the cake, courtesy of Wall Street's derivatives invention and the speculative boom created when that cash flushed back through the system in the form of excess liquidity.

    But ex the speculative crowd, even among the subprime buyers, the basic idea that "a home is better than an apartment," explains most purchases.

    Posted by: Beezer | Link to comment | Jul 07, 2009 at 02:27 PM

    A.Citizen says...

    The idea that we will 'never run out of room for housing...' is just flat wrong.

    We already have.

    If...

    You take into account transportation costs to work. Few folks here and elsewhere seem to remember rule one about 'real estate' it's the same as rules two and three.

    Location.

    If you have any idea what the words 'peak oil' and or 'sustainable economy' you would realize why houses in or near Las Vegas are doomed to be abandoned while houses in Seattle, SF and Chicago, say, are slated to increase a lot in price. The days when you could just fire up the 'dozer and start cutting lots to be successful are OVER!

    The market is very granular and frankly Schiller and his ilk make me laugh with his 'analysis' of housing 'value' today when only a few months ago he was telling folks that his work could not be used for same.

    Some parting words for yah...

    'Ogalalla aquifer...'

    Posted by: A.Citizen | Link to comment | Jul 07, 2009 at 02:39 PM

    Beezer says...

    Matt notes:
    "Bureau of Census data put the unsold inventory at 700,000; or about 16 months supply. Using $150,000 per unit, this comes to $110 billion in too many houses, much less than 1% of the economy. (Is my math right?)."

    When all this began to unfold the same observation had a lot of people scratching their heads. Some said a $1 trillion buyout, in effect, would solve the home mortgage crisis.

    What was not widely understood (at first) was that the derivatives market had compounded the trillion over and over again, on balance sheet, off balance sheet, offshore with SIVs and just about anywhere else conceivable. When you get derivatives that end with the word "squared," you know you've got problems.

    What cratered everything was this uber speculation, levered beyond belief at the wholesale level. Once Lehman left this world, there ensued a wholesale "run on the banks." Every derrier in the banking world slammed shut in unison.

    The truth is the "workout" of the asset leverage is likely to be close to $10 trillion in the US. Banks have several trillion left to go. So everyone goes to church and prays for a continued positive yield curve. Not too hot and not too cold, just right Poppa Fed.

    We had a pretty robust speculation in housing, for certain. But it went to the stratosphere at the professional level, and it was there where the financial system toppled. Pigs, as they say, always get roasted.

    Posted by: Beezer | Link to comment | Jul 07, 2009 at 02:42 PM

    Beezer says...

    As an aside, the most unforgettable moment (so far) in all of this was Bernanke's appearance before the Senate Committee where he said, in no uncertain terms, that no way would any TBTF banks be allowed to fail.

    Imagine, if you will, being a poker player against Bernanke. You can double down and wipe his stack out. Then with a snap of his fingers, his entire stack reappears.

    It didn't even matter if Bernanke was bluffing before the Senate Committee. If you're that poker player, you fake a cell phone call from your mother in the hospital and announce "she's getting worse," whereupon you excuse yourself from the table.

    It was after that appearance that the run on banks truly began to relent. The crap on the balance sheets is still there, but the run is over.

    It was a memorable performance and one I'm certain will end up in the history books.

    Posted by: Beezer | Link to comment | Jul 07, 2009 at 02:57 PM

    ken melvin says...

    If housing is being treated as a commodity, it shouldn't be.

    Posted by: ken melvin | Link to comment | Jul 07, 2009 at 03:07 PM

    Outsider says...

    My house mortgage is about 65% of what a lease would cost. Plus, I gain equity at each payment. Plus a mortgage interest write off. eventually (though I could pay off the mortgage now), the 5.5% may look good if inflation resurfaces. I have flexibility. last resort, my dwelling will be paid for. If I wish i can sell. and realize lots of $.

    Also here (CA.) the land is worth about 5 - 6 times the cost of the house (and they ain't growin' more of it ) I can see the north end of Catalina Island from my front window and can walk to the beach. Perfect weather, no bugs. My cousin in Texas invites me to visit. "Come in the Spring, (implied to hinted) the rest is too ugly, droughts, hurricanes, winds, temperatures beyond the endurance of Davy Crockett.

    My house gives quality of life, security, equity, tax advantages, flexibility. Yeah, if I was a genius I would have sold in 2006, rented, waited, but if I were such a genius it would have been better to short GM a while back using puts and owned the world in a few years. Timing vs. asset allocation is the issue. Be a player. Win big, lose big. or...plod along and be secure.

    Posted by: Outsider | Link to comment | Jul 07, 2009 at 03:09 PM

    kthomas says...

    The bottom will not be reached until 2012.

    We're barely in the 4th inning of this slide in property values.

    Keep slidin', baby.

    Posted by: kthomas | Link to comment | Jul 07, 2009 at 03

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