Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

44 responses to “Time to Let the Snake-Eating Gorillas Freeze to Death”

  1. Kary L. Krismer

    Well they didn’t say it was being considered, only that it was too early to say it wouldn’t be revived.

    The problem with ending things like that is there will always be a letdown when they end, no matter what the market. I would say while it’s too early to consider the return of the credit, it’s also too early to panic. Give the market a chance to find equilibrium.

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  2. Kary L. Krismer

    Tim, I’m not sure why you expect them to say things that would benefit any sector of the economy.

    It would also have been far better for the economy to have not said that without the stimulus, unemployment would rise to X%.

    It would also have been far better for the economy to have not called this summer the “Summer of Recovery.”

    It would have also been far better for the economy to have not promoted Gulf tourism and then have two trips elsewhere, and then when you do finally travel to the gulf area make a planned announcement about local zoning decision in NYC.

    It would have also been far better for the economy to have said over a year ago that you will extend the Bush tax cuts.

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  3. CCG

    If we let the market clear, the terrorists win! ™

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  4. Scotsman

    Credit, schmedit. Wake me up when the free house offer is on the table.

    Hey, it may not be that far off! Here’s Charles Hugh Smith with a serious discussion on forgetting quantitative easing and just going straight to the big cash dump. Trigger will love this.

    Tax cuts are so old school. Real politicians go for the big giveaways!

    http://www.oftwominds.com/blogaug10/QE-helicopter-drop08-10.html

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  5. softwarengineer

    They Tell Us to Save More

    Then tell us to spend more too. They tell us deficits are horrifying right now, but if we don’t make the deficits worse it will be horrifying too.

    The bottom line, IMO, we’re being lead by neurotic wolves in sheep clothing….LOL

    How about the truth for once? Just tell America we lost most of our longterm jobs’ base and we’re over the credit limit to bandage it anymore. Hades, using the excuse that having no industrial base ensures less pollution in our country is a joke too….it’s OK to pollute Asia, especially with their lax environmental standards?

    I’d add we buy their items cheaper, but when you add in the profit from America’s greedy import companies [i.e., Walmart, etc, etc]….even the term cheaper is a joke too.

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  6. Dan

    Couldn’t agree more. Am also seriously considering buying a home within a year IF the market is left to stand on it’s own. Was going to buy this year but held off the purchase in the hope that prices will settle down. Maybe I’ll be renting for awhile longer.

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  7. chico

    Cartoons are now serious discussion on Seattle Bubble!

    The dumbing down of America!

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  8. hoary

    By chico @ 7:

    The dumbing down of America!

    I learned everything I ever needed to know from the Simpsons!

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  9. Dirty_Renter

    In the old days, it was called government borrowing ‘crowding out’ private sector borrowing.
    Invasive species, come to think of it, there were quite a few of those mulling around the campus in the early 70′s.

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  10. hoary

    By softwarengineer @ 5:

    I’d add we buy their items cheaper, but when you add in the profit from America’s greedy import companies [i.e., Walmart, etc, etc]….even the term cheaper is a joke too.

    I went Home Depot this weekend to get rubber mallet to hammer down some stakes in my yard. The cheapest “Made in America” mallet cost $12. The “Made in China” mallet cost $3 farking dollars!

    I paused, chortled at the imbalances of global economics, and bought the $3 mallet. P.S., stakes got hammered successfully.

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  11. Sunshine

    Seriously!

    As a prospective homebuyer, the prospect of a tax credit definitely hurts. It will temporarily inflate the homes values, then once I’ve bought at the inflated price, it will expire and then I will be “underwater” as soon as the price drops. Even the tax credit I receive will probably be lost, when the government has to raise some other tax to pay for my tax credit.

    The tax credit bails out home sellers, realtors, builders at the expense of the general public. No thanks! I’ll wait it out…

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  12. Blurtman

    Here is a nice synopsis on the financial meltdown and how it happened. It is an easy listen.

    Listen to all three segments: http://www.financialarmageddon.com/2010/08/interesting-viewing.html

    Oh, and Tim, I did not know you were a renter. Oh…

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  13. softwarengineer

    RE: hoary @ 10

    How About Their Metal and Material Quality?

    I still have old American made heater elements and heater units made in America decades ago that still work….try that with a thinner [not cheaper either] Chinese imitation. You replace them constantly in your house, if used frequently. Hades, you’d be better off buying used domestic than new Chinese on these items.

    We made everything in America in the 60s and 70s and yeah, it cost a bit more, but the real wood furniture lasted several generations, not the stapled thin/soft wood junk they sell now.

    But alas, fill the landfills [or Asian rivers] with your obsolete TVs and autos, electronics, etc, etc [and claim you're a good Earthday citizen, LOL], but real recycling is electronics and appliances, etc, etc that last and can be repaired forever, economically too.

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  14. One Eyed Man

    “I would much rather have a rationally-functioning market”

    I would caution you not to confuse a “rationally-functioning market” with a market free of government regulation or interference. The very existence of a market is based upon some set of regulations that define the transaction, the rights of the parties, and the means by which society will enforcement those rights. The issue is the amount and effect of regulation, not whether some form of regulation is necessary. I doubt that markets with either the least invasive amount of regulation or significant socially motivated regulation are always the most rational and functioning. Both “laissez-faire” markets and highly regulated markets are occassionally irrational and disfunctional, although perhaps for different reasons.

    With that said, I was not personally in favor of the first time buyer credit last summer, nor am I in favor of it now. But then again, Fannie existed for 70 yrs before the current housing bubble. Fannie probably contibuted to an upgrading of the average housing stock in America and helped a lot of people escape the shanty towns of the pre-WWII years. But whether Fannie is a necessary socio-economic entity in the days of “granite-counter tops and SS appliances for all” is an entirely different issue.

    As to whether the credit was successful as stimulus, I spent last weekend sailing with 3 old friends. One of them is a VP for a construction materials supplier traded on the NYSE. Last year we made predictions on a number of things ranging from whether the stimulus would be a success, to the amount of the national debt. He is a moderately conservative republican and as one would expect, he predicted that the stimulus would be a bust. He voted on Saturday that his prediction should be considered incorrect. He said that his employer and some of their clients potentially would have failed last spring, but for the credit. Just like this isn’t a “recovery” if you lost your job, the stimulus was probably a success if you think it saved yours.

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  15. Daniel

    By softwarengineer @ 13:

    We made everything in America in the 60s and 70s and yeah, it cost a bit more, but the real wood furniture lasted several generations, not the stapled thin/soft wood junk they sell now.

    I think blaming the Chinese here is closing your eyes: They produce exactly to the specification US companies tell them too. Blame Wal Mart (, …) for exploiting that the average Joe is too stupid to realize that not every short term saving will be a long term profit. Don’t get me wrong I shop at Wal Mart too, but only for things that are the same everywhere. For all I care the rest may rot on their shelves.

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  16. Daniel

    By chico @ 7:

    Cartoons are now serious discussion on Seattle Bubble!

    The dumbing down of America!

    Isn’t the real issue that (some) cartoons are now at a higher level than all major US news stations? Thinking of it, I would even extent this to 95% of the print media.

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  17. matsayswhat

    RE: hoary @ 10

    I bought the cheap mallet too and it broke after I got a little aggressive with some mallet-ing. It’s duct taped up for the time being, but I’m really annoyed that I didn’t just buy the nicer mallet.

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  18. ray pepper

    Bring on the STIMULUS!! Sellers get yet ANOTHER chance to UNLOAD!…..

    Seller credits, brokerage credits, tax rebates, stimulus rebates, lowest rates in history………Its gonna be a feeding frenzy….or is it?

    Delaying the inevitable? Well surely………….Satisfaction NOW is always better then hell later……..Its the American way…………..

    LETS DO IT!

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  19. Scotsman

    RE: matsayswhat @ 17

    You should have bought two- that way you’d have a spare- and still have $6 in your pocket.

    ;-)

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  20. Blurtman

    RE: One Eyed Man @ 14 – Whether the stimulus worked or not is a philosphical argument as there are no agreed upon metrics to measure success or failure. By C. Romer’s standards, it failed, as unemployment did not drop to 8%.

    Unemployment is still terribly high, and wages for the employed are falling. What a few proponents of the “it worked” viewpoint fail to take into account are real measurements versus nominal ones. By that I mean if unemployment dropped to 7%, but everyone was making minimum wage, the pro crowd would claim success.

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  21. RoflCatDown

    I wish they had created a taper-off date for the credit to create a weaning time rather than simply stopped cold-turkey. The theory behind the tapering off would be to lessen the withdrawal effects of the credit. The market could work itself out slowly, and theoretically there wouldn’t have been this sudden sinkhole that the whole housing market fell into.

    While I find the idea of owning a home as an investment absurd, I do not think it is anyone’s best interests to have housing prices in a continual and a growing number of people falling underwater every day. If this continues banks will actually stop lending, because there is nothing to keep them from continuing to hemorrhage cash.

    Some people may think, “Serves them right.” but without a stable currency and banking system in place, our economy will completely fall apart. Which was the actual point of the stimulus in the first place.

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  22. RoflCatDown

    RE: Daniel @ 15 – There’s a reason why Walmart’s HOUSE BRAND of clothing is called faded glory…

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  23. engineer

    Tim,

    Just wanted to thank you for your blog. I sent you an IM over 4 years ago when you first started blogging. I graduated about the same time from UW with my engineering degree the same time as you did.

    Let us know when the next Seattle Bubble happy hour is. I will try to stop by

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  24. RoflCatDown

    RE: Daniel @ 15 – As for building things to spec of US companies. More likely the company in China produces something and sells it to to retailers in the US. It’s not like the US is the only consumer of rubber mallets in the world.

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  25. hoary

    By matsayswhat @ 17:

    RE: hoary @ 10

    I bought the cheap mallet too and it broke after I got a little aggressive with some mallet-ing. It’s duct taped up for the time being, but I’m really annoyed that I didn’t just buy the nicer mallet.

    But is your duct tape American made!? Wow, that must’ve been some aggressive mallet-ing indeed though!

    I think I was sold on the fact that I spend more daily on artery-clogging coffee beverages than this tool I’ll have in my garage for who knows how long. Shame on me is the takeaway, I guess.

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  26. One Eyed Man

    RE: Blurtman @ 20

    I’m in full agreement with you.

    As a matter of fact, on the boat we have a contest to see who gets the most predictions right and we thru out the “Did the stimulus work” question because we agreed there was no objectively defined measure for assessing it.

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  27. mydquin

    Tim, you have been duped by those who would like to displace blame. Fannie & Freddie did not cause the bubble. Fannie and Freddie *reduced* their mortgage holdings during the period when the housing bubble blew up (2002-2006). See the links. The bubble was brought to us by private mortgage-backed security issuers (i.e. the investment banks) and the companies that facilitated that process (i.e., credit rating agencies and mortgage originators).

    http://krugman.blogs.nytimes.com/2010/06/03/things-everyone-in-chicago-knows/
    http://krugman.blogs.nytimes.com/2008/11/17/fannie-freddie-data/

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  28. Daniel

    By RoflCatDown @ 24:

    RE: Daniel @ 15 – As for building things to spec of US companies. More likely the company in China produces something and sells it to to retailers in the US. It’s not like the US is the only consumer of rubber mallets in the world.

    I have seen a German language documentary about IKEA in which it was explicitly mentioned that any part of any IKEA product made in China is according to IKEAs ideas of how it should be. The example product they illustrated this on was shower curtains. Yes, even for such a simple product they had many criteria and would not buy it if they were not just like ordered. They interviewed the Chinese factory boss and he even mentioned that they had to produce their product cheaper as IKEA was not happy with the original price. When asked how much profit the company makes on each shower curtain he gave a figure about 1/10 of what IKEA is estimated to make. He also mentioned producing shower curtains for other leading retail stores. I found that account plausible and would be surprized if it is different for Wal Mart.

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  29. Herman

    By One Eyed Man @ 14:

    “I would much rather have a rationally-functioning market”

    I would caution you not to confuse a “rationally-functioning market” with a market free of government regulation or interference.

    OEM – your posts are usually great, this one not so much. What The Tim is referring to is a market where the government interference is not so erratic, unpredictable, and biased to serve certain private interests ahead of others.

    This climate paralyzes everyone. Why? Because the government is immeasurably powerful. Since it writes the rules of the game, private interests will not act until they understand the new rules. Right now the rules are unclear and constantly changing, and so there is no investor action at all.

    This is like a poker game where every so often, at times that no one could predict, the house steps in and hands an extra set of chips to one of the players. Is player #2 almost of of chips? — no wait, the house just made them whole (read: GM). Wow, what a great windfall for player #3, the house just doubled his stake (read: banks). Uh oh, the house just stepped in and took $20B from player #4 (read: BP).

    What about me, will I get more chips? Should I take a risk and try to win some, or just beg the house for some more free ones instead?

    In that sort of a game, nobody is going to make a big bet. We’re all going to stick with the minimum ante and see what the house will do next. Or we will take our chips to another casino.

    In this climate, a private entity will spend more time understanding and influencing the government, as opposed to investing and putting people to work.

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  30. David Losh

    RE: mydquin @ 27

    Thank you, and the idea that the government orchestrated the housing bubble is off base. They helped, they puffed for sure, and encouraged, even bragged about home ownership, but they did nothing. They also did nothing to stop it.

    Housing prices are over inflated globally. I was talking with some one who just got back from China, and housing, in city, is out of reach for the majority of working people. In China working people are the economy.

    So if you are thinking of buying a home this year, you need to watch more than Case Schiller, US bonds, and the stock market. Somewhere, some time, soon, there will be a break in the financail sector. Securities, and the equity in securities will become more transparent. Some sector will blink, and there will be a quick panic. After that panic, will be the time to buy a house.

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  31. pfft

    By Blurtman @ 20:

    RE: One Eyed Man @ 14 – Whether the stimulus worked or not is a philosphical argument as there are no agreed upon metrics to measure success or failure. By C. Romer’s standards, it failed, as unemployment did not drop to 8%.

    Unemployment is still terribly high, and wages for the employed are falling. What a few proponents of the “it worked” viewpoint fail to take into account are real measurements versus nominal ones. By that I mean if unemployment dropped to 7%, but everyone was making minimum wage, the pro crowd would claim success.

    romer would not say it failed. saving jobs is not failing.

    wages are not falling. what data are you seeing?

    http://www.calculatedriskblog.com/2010/08/personal-income-spending-increase-in.html

    personal income has been rising for almost a year.

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  32. pfft

    By mydquin @ 27:

    Tim, you have been duped by those who would like to displace blame. Fannie & Freddie did not cause the bubble. Fannie and Freddie *reduced* their mortgage holdings during the period when the housing bubble blew up (2002-2006). See the links. The bubble was brought to us by private mortgage-backed security issuers (i.e. the investment banks) and the companies that facilitated that process (i.e., credit rating agencies and mortgage originators).

    http://krugman.blogs.nytimes.com/2010/06/03/things-everyone-in-chicago-knows/
    http://krugman.blogs.nytimes.com/2008/11/17/fannie-freddie-data/

    the private market stepped in and took over and ran wild helping cause the housing bubble. so much for the private sector knowing best. greed isn’t always good.

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  33. pfft

    By David Losh @ 30:

    RE: mydquin @ 27

    Thank you, and the idea that the government orchestrated the housing bubble is off base. They helped, they puffed for sure, and encouraged, even bragged about home ownership, but they did nothing. They also did nothing to stop it.

    Housing prices are over inflated globally. I was talking with some one who just got back from China, and housing, in city, is out of reach for the majority of working people. In China working people are the economy.

    So if you are thinking of buying a home this year, you need to watch more than Case Schiller, US bonds, and the stock market. Somewhere, some time, soon, there will be a break in the financail sector. Securities, and the equity in securities will become more transparent. Some sector will blink, and there will be a quick panic. After that panic, will be the time to buy a house.

    the private sector was just as drunk. it wasn’t just housing. supposedly smart money like private equity and hedge funds all got into the act.

    the smartest of the smart got caught. remember john devaney? he was supposedly the best

    The investors: How to get rich trading “idiot” loans
    http://money.cnn.com/2007/05/01/real_estate/bubble_investors.moneymag/index.htm

    Option ARMs? Devaney loves ‘em. “The consumer has to be an idiot to take on those loans,” he says. “But it has been one of our best-performing investments.”

    fast forward.

    Masters of the Universe aren’t so masterful after all
    http://www.businessweek.com/the_thread/hotproperty/archives/2007/07/masters_of_the.html

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  34. mydquin

    The tax credit does indeed steal present demand from the future. However, it is just as important to understand the problems that come with Tim’s freshwater view of the housing market. There is much more to the economic big picture than just the speed at which the housing market clears.

    The ecosystem metaphor is misleading. People are not like other plants and animals. Unlike other animals, people can declare bankruptcy, which does systemic damage when debt obligations get written off. Moreover, bankrupt home sellers can cause the housing market to get oversold in the way that short sellers can cause the stock market to get oversold. Such overselling creates even more bankruptcies so that a hands-off approach can lead to a death spiral. Additionally, people also need stable homes to be properly socialized and educated so that they don’t end up being a burden on the rest of society in the long run. The tax credit is not an ideal solution, but the short-term bumps in demand caused by the tax credit reduce bankruptcies and preserve stability for many families.

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  35. pfft

    By mydquin @ 35:

    The tax credit does indeed steal present demand from the future. However, it is just as important to understand the problems that come with Tim’s freshwater view of the housing market. There is much more to the economic big picture than just the speed at which the housing market clears.

    The ecosystem metaphor is misleading. People are not like other plants and animals. Unlike other animals, people can declare bankruptcy, which does systemic damage when debt obligations get written off. Moreover, bankrupt home sellers can cause the housing market to get oversold in the way that short sellers can cause the stock market to get oversold. Such overselling creates even more bankruptcies so that a hands-off approach can lead to a death spiral. Additionally, people also need stable homes to be properly socialized and educated so that they don’t end up being a burden on the rest of society in the long run. The tax credit is not an ideal solution, but the short-term bumps in demand caused by the tax credit reduce bankruptcies and preserve stability for many families.

    what you are basically saying is we are distorting the housing market so that the larger economy does better? do I have that right?

    good point.

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  36. Kary L. Krismer

    RE: pfft @ 36 – I think what he’s saying is the government acted to prevent an over-correction, which itself would have serious adverse consequences.

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  37. mydquin

    Exactly. Make no mistake. The tax credit was problematic. There might have been better ways to use that money. But if you don’t recognize the indirect economic feedback loops that I described, then you are missing the bigger picture about why the tax credit might have been useful.

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  38. Rysl

    You should just come out and say it, because that is the meme you are propagating in your “simplification”.
    Does anyone remember that it was unregulated securities that hid all the bad debt? And as for that bad debt, I was shut out of buying a house in 2004 by someone who flipped it 6 months later for a profit. I know one person who made lots of money that way (and now he’s way over-leveraged). How many infomercials suckered people into making money from real estate with no money down?
    This crisis was caused by GREED, and many innocent people were duped by unscrupulous bankers who did not care about their clients because the mortgage was going to
    Be hidden in some security on the other side of the world!

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  39. Rysl

    Sorry about continuing, my iPhone is misparsing…
    My point is that I suspect the main culprits to be people flipping houses (but have not seen any numbers to support or refute this, has anyone else?). Bankers were perfect happy to finance them 100%, since no one was checking.

    I’ve never sold a house, but I also suspect that the reason why all this flipping occurred was because the capital gains tax is so low. I wonder if it were up at 50%, whether the housing market would have been overtaken with so much greed.
    A final simple thought, Keysan economics got us out of the great depression, and Milton Friedman thought up tickle-down economics to oppose those ideas back in the stagflation era. Which strategy is best suited now?

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  40. Rysl

    Sorry, the false meme that’s being propagated is that “poor people wrecked the housing market”

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  41. Rysl

    RE: Herman @ 29
    Private enterprise has been buying politicians and election rather than invest in citizens for a while now.

    It is disgusting the you make the analogy that Big Govt just stepped in to fine BP – which just oiled the entire Gulf! As for stepping in for GM, that is a whole sector of our economy that’s been suffering under so-called free trade for many years, but yeah, what good are they? You sound like someone sticking up for billionaires, I bet the only thing the Govt has done to YOU is give you a tax break, but maybe I’m wrong…

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  42. Rysl

    By Kary L. Krismer @ 2:

    It would have also been far better for the economy to have said over a year ago that you will extend the Bush tax cuts.

    First, the tax cuts are being extended for 98% of citizens. Second, extending it for the other 2% would make the Dow go up, but that’s not really reflecting the scram economy, is it, instead that money could be used for much better things, such as paying down the debt. Finally, the stimulus was mostly tax cuts for the middle class. It was going to be much bigger (and more effective) but for some reason needed to get 60 votes in the Senate instead of just a majority, like in most democracies.

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  43. MacroInvestor

    RE: The Tim @ 34

    “If I were writing the post today I would have used “unmanipulated.””

    Yes Tim, we know what you’re trying to say. And you are right. But NOTHING in this bogus capitalists society is honest or unmanipulated these days. The bankers and mega corporations rule. They grease the government to get huge advantages over everyone else, and they grease the media to spin it as okay.

    Imagine the housing market truly capitalistic. No fannie/freddie, no interest deduction, no industry groups promoting “buy before you’re priced out forever”, no “cooperative” appraisers, no fed forcing down rates, etc…

    I say the fair price of a home would be about half of what it is today. That is why I’m scared to buy. The bottom falls out if we return to honesty. The buyer is the only guy at the table who doesn’t know who the mark is.

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