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« ETF Update: Midcap Move | Main | Requisite Investor Skills: Think Critically and Accept New Evidence »

March 09, 2010



Curtis -- Let's start with ignorance. Anyone who says that markets are not "clearing" does not know the meaning of the term. That probably includes several leading pundits. Markets clear at the intersection of the supply and demand curves. End of that story! You either get it, or you don't.

Your points relate to factors shifting the curve. The points are quite valid. Here is how I responded to a similar question on Seeking Alpha.

"The federal programs have shifted the demand curve --- effectively increasing the buying power along the distribution. This leads to a higher price and quantity.

The existence of the programs also affects those who own existing properties. As the government ends the programs, the demand curve will shift back.

This is a good example for economic analysis."

We have a difference of approach. I am trying to educate people about a method, one that will help in many similar cases. The method yields differing conclusions with differing data.

You are starting with a strong opinion about housing, public policy, and what is going to happen.

Essentially, you are making a case for the shape and slope of the curves, and how they might change with a shift in policy.

I do not diasagree! Do not! But I urge you to think not in terms of your one person anecdotes. Look at a distribution of buyers and sellers.

Great food for thought.



Curtis White

In what cases might not exchange take place? Buyer A bought house at inflated price because Speculator bought house to flip it. Buyer A is now under water. Buyer B now needs a house but his price is much lower then Buyer A is willing to sell for because credit, job security, and future expectations are different. Now we have a wide market where no trade is taking place.

What can happen? Buyer A perception can change and he may sell out for a loss or the government may intervene and change Buyer B perception.

I'm just not sure your argument is very convincing. There may be such things as book value and segmentation of market worthy of consideration, as well. I.e debt/credit and mark to market.

Curtis White

Old Bull, I follow you because I like to get a different perspective. But this case

"One was that the market needed to push prices down so that it would clear. This reflects ignorance. Markets clear at the current price."

I don't see how this reflects ignorance. As it represents that there is greater demand at lower prices thus it means if prices were not artificially held up then the more houses would be exchanged.

Obviously there is more demand at lower prices then higher prices and more supply at higher prices.

I think the "key idea" is the idea that the prices are being artificially held up buy first time buyer credits or other interventionist policies including recorded cases of demolishing homes.


Populist -- I am sorry that you do not like the tone of my articles. I really try quite hard to explain concepts in a friendly way. I often write as if I were speaking directly to someone like you. Many people find it engaging, and that is my objective.

There is a fundamental problem in teaching. I am trying to communicate things -- facts, concepts, methodology -- that I know and you do not. Since my motive is to help you make better investments, I present my arguments as forcefully and effectively as possible.

If your mind is already made up, there is only so much I can do.

Meanwhile, I hope you keep reading. I read many authors with whom I disagree, even though my teeth are grinding.

Thanks for commenting.



Hi Orlando -- I think I understand your comment and the cultural implications. I am not sure about the relevance of my personal story, but it is certainly not as you depict it to be. My grandparents moved in with others in the depression years. My parents lived with my grandparents to start their families. My own family started in a very modest apartment.

None of this has much to do with the thrust of my article. The main point is that there are a lot of families that will seek housing when they get the opportunity. It is not a "light switch" situation as most depict it to be.

I also do not assume rationality, except as a starting point. I argued with my professors about this in the 60's.

So -- I plead with you to read the article again. It makes a couple of very modest claims.... very modest.

Thanks for a comment that I suspect is shared by many.


Orlando Rentals

You are making a false assumption based upon your generational bias.

You are a member of the second generation in North America in the history of Western human civilization to not have the majorities of people living in multigenerational households.

The vast majority of immigrants in this country are not even a generation removed from multigenerational households as their native society's social norm.

You seem to be arguing that householders are completely rational economic housing market participants EXCEPT in the one case when it comes to living with in-laws. Again, even i have a hard time disagreeing, but you going against the written history of the entirety of human habitation outside the last century.

Populist articles


first I have to tell you that I really don't like the way you often condescendingly dismiss anyone else's view as stupid. Seriously, your arguments are not nearly as compelling as you want to make other people believe.

As for the shadow inventory: what about all the housing moratoria, mortgage modification programs, rising delinquencies and the 25% of home owners who are in negative equity? I guess you also consider the companies that provide this information (e.g. core logic, lender processing services etc.) as companies that have no clue about the situation in the housing market. What do you think will happen to home prices if those people (strategically) default? I guess according to the law of supply and demand prices will fall further.

And as for the huge pent up demand: Yes, there is probably a lot of pent up demand (if you look at what people want). But I guess the new home sales data recently showed that there is not much buying power on the sideline. Look for example at the devlopment of real disposable income less transfers. By that measure for example I don't see how people should be able to actually pay for what they want.

Oh and one note about the comparison to the oil industry: maybe the oil industry doesn't cut production because it's costly. But then again, the oil industry can be sure that the demand for oil will rise again because it's still a necessity. Can you say that about (a willingly subsidized and completely distorted) housing industry, too? The house price to rents ratio suggests that there is still upside potential for renting vs. owning a house.


I think you're moving in the right direction to provoke a thoughtful conversation.

However, one problem with the analogy of oil markets would be the massive investment needed by the "shadow demand" to purchase a home. Many of these people have no chance to come up with a downpayment to purchase a home without the subprime market. Renting would be an obvious alternative -- not available in energy markets.

A generational effect may also begin to influence the market. Some baby boomers own several homes and may plan to downsize at some point in the next 10 years as their health degenerates. This supply may not be sucked up for some time.

One type of phenomenon could bolster your argument. In places like Detroit, they may bulldoze extra supply.

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