Center for Economic Policy Research paper: highlight’s fundamentals (largely ingnored) and the media’s role.

Hi Bubbleheads, doom ‘n gloomers and market enthusiasts ….

Good Reading: Via Jessica Swesey at Inman News blog gives us a glimpse into the mechanics of the bubble. She cites a paper released last week by Dean Baker of the Center for Economic & Policy Research asks:(PDF document & very easy reading with excellent analysis)

  • What about the fundamentals that were at odds with forecasts, particularly those economists from NAR (National Assoc. of Realtors), NAHB (National Association of Home Builders) and the MBA (Mortgage Brokers Assoc.)?
  • What role did the media play?
  • Why was it so difficult for many to see that housing prices were spiraling to absurd heights?

“In many cases, the experts worked for organizations that had a direct material interest in sustaining the bubbles. Voices of caution were rarely presented. When it came to some of the most fundamental financial decisions that families face, investing retirement funds and buying a home, the media were badly misinforming the public.”

– Center for Economic & Policy Research, August 2007.

In other news: I’ll be visiting Massachusetts late this week and into next week and will compare and contrast market conditions in New England vs. Washington State. I expect it to be interesting and I’m crossing my fingers I can talk with the CEO of one of the largest investment management companies in New England to discuss the recent liquidity crisis. Wish me luck because it is intimidating talking to someone who manages literally billions.

Your real estate market enthusiast,

“S-Crow” (Tim Kane)

Legacy Escrow Service, Inc.

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About S-Crow

"S-Crow" (Tim Kane) is co-owner (with spouse Lynlee, LPO-Designated escrow Officer) of Legacy Escrow Service, Inc., an authentic independent escrow firm closing residential purchase/sale and refinance transactions.

23 comments:

  1. 1
    Matthew says:

    Good luck S-Crow!

  2. 2
    EconE says:

    Why be intimidated? He puts his pants on one leg at a time also.

  3. 3
    deejayoh says:

    That is good stuff. Well worth the time to read it

  4. 4
    rose-colored-coolaid says:

    I think this statement from early in the article gives us a more reasoned bounds for the downside of housing. I know we’ve debated this before, but here goes some math.

    A series constructed by Yale economics professor Robert Shiller shows house prices have tracked inflation for the 100 years prior to 1995. Since 1995, house prices have risen by more than 70 percent after adjusting for inflation.

    If this is accurate, and the future conforms to the past, and housing completely busted tomorrow, you could expect a 40% decline to offset the 70% increase. The crash will play out over several years, so a 40% decline is more like a reasonable upper bounds.

  5. 5
    S-Crow says:

    Deej.-, yes very good paper and easy for the economic novices like myself to digest.
    Econe- I chose the wrong word. Intimidated is probably not correct, but I do wonder with ‘wonderment’ what it’s like to manage billions. It is quite the responsibility if you have your head on straight.

    Rose- time will tell.

  6. 6
    ALan says:

    so a 40% decline is more like a reasonable upper bounds

    Bubbles can work in reverse too. 40% may just be the point at which prices stop accellerating downwards. They may end up dropping well below 40% as everyone and their barber declares that real estate is a horrible investment.

  7. 7
    Jeff says:

    Many believe that prices will remain flat until conditions “catch up” with the excess prices.

    Using the historical (1914 to 2007) inflation value of 3.29% it would take 16.2 years for inflation to “catch up” with a 70% price excess.

    Just another spin.

  8. 8
    Buceri says:

    Jeff; I think those people are a bit late. Prices have declined in the past 12 months in most of the country. We will probably go down for another 1-3 years , and then get back to the 3-5% annual increases. How much down? I like the 30-40% mentioned in previous postings.

  9. 9
    JohnnyBigSpenda says:

    umm… people have to live somewhere while all this is going on. are you all saying that the demand for housing is going to drop by 30-40% (or even 25%?)? At some point, even bankrupt people need shelter… where do all these people end up living?

  10. 10
    anothermatt says:

    Another possibility is that the cpi is a really inaccurate way of determining the real rate of inflation (it tracks to rent and excludes food and energy). There has obviously been a huge amount of irresponsible lending, but ignoring inflation seems like a bad idea esp. considering how much liquidity has been pumped in in the last week.

  11. 11
    urban exile says:

    i agree with johnny…everyone’s got to live somewhere. Maybe this will lead to a renting bubble!?

    Before we get to that point, though, perhaps the government will intervene…

  12. 12
    Buceri says:

    Correct; people hand over the keys and their $2000 mortgage to the bank, and go back to renting for $1200 like they should have done all along.

  13. 13
    wreckingbull says:

    As far as the Shiller graph is concerned, here is a graphical model of a likely reversion to the mean.

    A picture tells a thousands words…

    http://tinyurl.com/2ns92m

  14. 14
    rose-colored-coolaid says:

    Shoot! The Shiller graph says a 2011 bottom of 43.5% lower than todays prices is likely. My quick calculation of 40% down was way off!

  15. 15
    uptown says:

    “people have to live somewhere”

    We’re not talking about large families. In most cases it’s singles or couples, making it very easy to double up. Demand will drop so fast you’ll wonder what they built all those units for.

  16. 16
    Nick says:

    That Shiller Graph was great. Do they have anything like the Shiller graph for the Seattle area?

  17. 17
    biliruben says:

    “People have to live somewhere”

    Uh, yeah. Usually. But they don’t have to own.

    We are at record inventory, record vacancies, record ownership and record prices.

    When you get to extremes, things tend to revert.

  18. 18
    greater context says:

    the Shiller graph shows price variation, but this is fairly meaningless. when you buy a house, you look at affordability in terms of monthly payment vs. average income.

    if you graph monthly cost (based on the prevailing loan type) and average income over time, you’d see a clearer trend of flat appreciation.

    even the 2000-2005 bubble would look pretty flat because of the change of loan types and low interest rates.

    then, to predict the 20?? price of a house, you’d just have to guess what the interest rate will be, the average income, and the loan types available

    plus or minus a speculation premium, of course

  19. 19
    greater context says:

    real seattle incomes will probably be flat over the next 5-10 years

    interest rates will increase

    assume exotic loans are gone for the next 20 yrs

    the speculative premium will be negative if the market loses more than a few %

    so, take the average monthly payment for a house bought today, take out 30% for speculation, and see what that same payment would buy on a 30 yr fixed loan at 15% interest (the kind of interest rates we saw during our last recession in the 80s)

    that is what the Greater Seattle Metro Area prices will trend towards, given an international housing bubble induced recession

  20. 20
    wreckingbull says:

    “if you graph monthly cost (based on the prevailing loan type) and average income over time, you’d see a clearer trend of flat appreciation.”

    Initially in this bubble, this was true. The problem is that the attributes of the loan which made it initially affordable (low teaser rate, IO, neg-am etc…) in the long run actually increase the total cost of that money and sharply increases monthly cost. We are just now starting to get to that territory.

    For this reason, I think that an inflation-adjusted housing index compared to an average trend line is a very powerful modeling tool. I don’t know if we will see the full 43%, but it certainly appears to be a possible outcome.

  21. 21

    ROME & AMERICA ARE LIKE TWEEDLE DEE AND TWEEDLE DUM

    Here’s a great FT.COM news article today comparing America to the fall of Rome. It states in part:

    “…David Walker, comptroller general of the US, issued the unusually downbeat assessment of his country’s future in a report that lays out what he called “chilling long-term simulations”.

    These include “dramatic” tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of US debt.

    Drawing parallels with the end of the Roman empire, Mr Walker warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government”….”

    The rest of the URL:

    http://www.ft.com/cms/s/80fa0a2c-49ef-11dc-9ffe-0000779fd2ac.html

    Thank God he does give us hope, but only if we act in the “longterm”, rather than destroying ourselves for a bit of “short-term”…..

  22. 22
    JohnnyBigSpenda says:

    i wonder how much demand has been created with the increase in divorce rates since the 50’s? now all those people who were doubled up have to go out and buy a house of their own. With all the apartments turned condo’s in Seattle, I’d say the rental market is going to get pretty tight. (new buyers sitting on the sidelines renting the meantime, old buyers who went bankrupt, divorceess who cant afford a house of their own after their wife takes half, ect ect).

  23. 23
    deejayoh says:

    >i wonder how much demand has been created with the increase in divorce rates since the 50’s? now all those people who were doubled up have to go out and buy a house of their own.

    Divorces = household formation. the data for household formation is in the report.

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