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« Fannie and Freddie Bailout: Initial Thoughts on Firing the Bazooka | Main | Lehman and Merrill »

September 10, 2008



Another way to look at it is to examine home inventory. As long as home inventory levels remain elevated, prices will continue to fall. This doesn't provide a useful guess now as to how far prices will fall before reaching a trough, but it does provide a real time indication as to whether we're near a trough now, and I suspect that it will be more reliable for this purpose than looking at whether prices have hit some pre-determined target.


I agree. Other factors are whether we are entering a recession since job uncertainty can hinder a recovery even if incomes are adequate, and how many have the credit to qualify if they were previously involved in the crisis. Energy prices have also skewed the data towards cities away from suburbs. The market may be turning up in some non-boom areas but may have another year to go in the boom areas.

Another common technique is to accept the data but to make a radical interpretation of it. Unemployment down? People have to work harder. Unemployment up? People want more leisure.


This is a rare event with no prior data points therefore no one knows what the eventual outcome is.


There are some great additional comments here about how many variables we really need to add. The problem with adding variables comes from the lack of data -- or at least data from different eras. I suspect (but cannot prove) that lending standards are not just a cause, but also an effect of the availability of capital and a securitization process.

It is also quite possible that we will overshoot to the downside -- or not.

This is a work in progress, but it seemed to be a good illustration of some modeling problems.

Thanks to all for the thoughtful reactions.



TR -- Thanks for the Burns link. That is one of RB's missing links :)



RB - I am not sure what happened to your comment with the links. We found it in the spam filter and restored it. I did receive your email (and responded) and I appreciate the sources, which I check periodically.

Thanks again,


Bill aka NO DooDahs!

Actually gaius, the MEDIAN carves out as much area beneath as above.

gaius marius

as RB notes, there's yet another missing variable -- underwriting standards. if there is any lesson to be learned from this bust, it is that prices and valuation metrics are completely, totally and always subordinate to underwriting standards.

when credit was easy and fraud rampant, prices flew to levels double any historical measure of affordability.

now that credit is difficult and diligence keen, prices can fall a very long way indeed -- as far beneath mean valuation metrics as they were above, and far below traditional measures of "affordability", which will be largely irrelevant until banks are recapitalized and unsold housing stocks decrease. and this to say nothing of credit demand, which appears to be suffering under a sea change in social mood.

it's important to remember that "mean" valuations are a midpoint, not a floor -- by definition, the metric carves out as much area beneath as above the mean.


Jeff, I agree that GIGO is a big problem with real estate models. Data lag, uneven reporting, and problematic sources (incl. NAR) make the situation worse. Another multifactor model worth looking at is from John Burns RE Consulting.


I had seen that post appear -- and I also emailed it to you. It had a lot of hyperlinks for my data sources, which is probably why it got deleted again. I assumed it was something to do with spam-software though.


RB - My editors only kill spam that typepad misses, and they certainly would not delete something of yours!

You pointed out research from PMI's Berson, but it was in a comment to a different housing post:

As you noted, that report was subject to varying interpretations. It is a source with a more sophisticated model, and they release a report quarterly. Here is the summer report, more pessimistic than the prior one:

There should be another one soon. More later.

Thanks for reminding me of this.



Addendum: the down payment is also another variable factoring into affordability, though hard to quantify, that becomes important at times such as today.,0,537937.story


Hmm.. I had responded "astutely" to the post of June 19 2008, but it seems to have been deleted. At the time, at the national level it pointed to another 15-20% to go in today's dollars including the effect of interest rates.

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