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« To Understand the Market, Understand Accounting Rules | Main | Market Response to Recessions »

January 14, 2008


gaius marius

certainly not many places, jeff, true enough. what you're taking the time to say is very rational and (in some quarters) wholly forgotten. there will be a resolution, and it will be dynamic.

my praise means little, but you maintain a fine blog here. thanks for your efforts!


Venn --

Well that is a clever idea! My fantasy was designed to stimulate thought. I have a few other notions about how this might be accomplished.

As we have argued on another thread, the problems are easier to see than the solutions.

Thanks for your thoughtful comment.



gaius marius -

Thanks for your interesting observations. Trying to state my viewpoint in a single sentence -- something I should have tried to do, perhaps ---

We cannot forecast housing prices in the future without a better understanding of supply and demand curves.

Current circumstances have thwarted regular economic analysis, so that we count the number of potential foreclosures and the inventory. Falling prices should help to clear the market. Helping qualified buyers get mortgages should shift the demand curve.

I'll bet that you do not read this anywhere else.



RE: Idea three of your SOTU address: Instead of an RTC government agency, what about a ETF, private solution.

Call it, the Credit Opportunity ETF?

gaius marius

i do agree that timing is an inherently unpredictable future variable -- and that it is less relevant than the level of real prices. but i would offer that there have been several housing booms and busts in the past, and that there is a broadly-drawn and data-derived template based not on theory but past experience for real estate booms and busts just as there is for equity booms and busts.

that template, it seems to me, suggests long-term-mean reversion in relative valuation metrics like price-to-rent and price-to-income is highly probable. i agree that securitization in some revised form will certainly stick, and that it will make credit more available than it would otherwise have been -- and that this will be an extension of a very long-term secular "democratizing" credit trend. but past experience has shown that such trends have not prevented mean reversion in relative valuation metrics in previous dislocations.

nationally, that means something on the order of a 30% average decline in real house prices vis-a-vis real rents. and while that could happen instantaneously, in the past transitions of lesser scale have taken at least 16 quarters.

this seems largely independent of past policy decisions, which (it can be argued) have served less to shorten the duration of market adjustments than to lengthen them. it could well be that any government policy which prevents a natural clearing of the real estate market in the aftermath of a period of manic lending pushes the end of the inevitable return of prices to stable income and rent relationships out in time while seeking to disperse the intensity of the adjustment.

if the underlying point that the article is making is that disaster theories are often fallacious, i certainly agree. and if the point is that predicting the future is subject to very significant error thanks to the unknowability of complex systems, i agree there too.

where my skepticism starts is where we might begin to disbelieve the implications of several eminently-applicable previous examples mostly because the range of possibilities they imply is unpalatable.

it does seem to me a formulation of a "base case" forecast in which housing is still on national average falling in price as the market mean reverts in two years (that is, 4q2009, being just 15 quarters from the 3q2005 mania peak) is not only plausible but the approximate mean of prior experience. of course one must monitor changing conditions going forward to amend as needed, but one could do much less reasonably for a starting point analysis.

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