Yesterday's Collapse...

Comments

[wilson]

It seems to me that yesterday's collapse is to a baseline number -- it's a reversion to the mean.

In other words, the Dow ought to some degree to reflect the core economy. A housing bubble can't last because the value of housing is the amount people can pay in rent, and unless the economy is raising salaries, rents can't go up. The housing bubble has collapsed, and with it, the Dow bubble has been deflated back to Clinton era levels. That's a better reflection of the actual value of our economy.

It also seems likely that with the Dow deflated to 2000 and 2002 levels (in equilibrium with pre- and post- 9/11 values), we've now discounted for the bad debt. Thus, we should be out of the risk zone. There is no particular reason that the underlying economy can't sustain those levels of rent, and as a result, no particular reason that housing prices would continue to depreciate much, (unless you think that the bubble produced dramatically more units of housing that Americans really wanted.)

I think the crisis is over. Just one economist's opinion.

[wilson]

Along those lines, why is there such fear of to putting a definite valuation on the housing market -- rent. That was my measure as I tried to decide whether to buy during the bubble -- isn't it the equivalent of price-to-earnings ratio for stocks? Wasn't the mantra of the dot com bubble that price-to-earnings didn't matter any more? Wasn't the essence of the housing bubble a studied ignorance of price-to-rent?

Now that real estate prices have reached rough equilibrium with rent, it can't decline much more.

There are a few neighborhoods with vacant homes -- supply with no demand at all. But overwhelmingly, the empty units are in exurban areas that gas prices have made unviable. So they aren't really depressing the market in a systematic way. The value of housing in Chicago simply isn't effected by spanty-new tract housing remaining empty 60 miles from downtown. You can see that in the market -- Chicago property has not declined over the last year.

While New York, DC and LA saw greater increases measured against price-to-rent ratios through the last 6 years, and hence have somewhat further to fall, the underlying situation is the same - there is basement on values in cities because people are willing to pay rent, and the basement is not flooded by the existence of empty exurban homes.

Likewise, most of the effects on the core economy have already been felt, because the construction industry has been in a slump for more than a year. Overbuilding is over, and the construction economy is approaching equilibrium too.

I have to say, I see little reason to worry at this point, and absolutely no reason to bail anyone out.

[Nathan Myers]

I suspect many receivers of McMansions will encounter restrictions at various levels that interfere with renting them out, and (in particular) with converting them to separate apartments. I.e. the rental market for these new houses will not be particularly liquid. Does this mean they will sit empty (and unmaintained), or that they will rent out at prices close to much smaller houses? T

[wilson]

I don't believe that's true. Conversion to apartments might be restricted, perhaps, but I don't know of any restrictions against direct rental of a unit of real estate, mcmansion or hovel, except in the case of some condo associations. There is an small but active (liquid) rental market for houses, which includes families who move to a new city temporarily and families who move out of their home while its rehabbed as well as people who just choose to rent a house (divorced parents are another example of people who often find themselves in need of something larger than an apartment, but aren't necessarily ready to buy.)

There is no question that if price falls below rent, more of these people would choose to simply buy. In small towns with older housing stock, the rental market is often predominantly houses.

I personally know of people who are in each of these categories right now - an about-to-divorce father looking to rent; a couple who've rented out their place because they expect to move back from London after 2-3 years; a family who are in another house in their town while they add a story to the house they own; and a woman who has just moved to South Bend and rented out a house because it was available in her price range. The market isn't illiquid just because it's not something that 8 in 10 households are looking to do.

[Mandos]

The traders are aaaaangry.

[christofay]

When we have been living above the mean, and we have for so many years, the correction goes below the mean and stays there to help balance the paper returns with the long term average. That is the market is going to fall and probably will fall below what's called average.

You could also say the U. S. has been flying above the mean and now the country will find what it's like to be average.

[ogmb]

SPIEGEL interview with German finance minister Peer Steinbrück:

http://www.spiegel.de/international/business/0,1518,581201,00.html

SPIEGEL: When did those initiatives begin?

Steinbrück: Back in the days of Gerhard Schröder's chancellorship. It was reinforced when Germany assumed the G-7 presidency in early 2007. The first real debate on the subject happened in February 2007, during a meeting of the G-7 finance ministers at Villa Hügel in Essen. Then British Chancellor of the Exchequer Gordon Brown was not very amused by our call for more transparency for hedge funds. The talks have been significantly more constructive since last fall.

SPIEGEL: What, specifically, will you call for?

Steinbrück: A few agreements were already reached with the British and Americans within the G-7 in April. They include imposing new rules on the conduct of the rating agencies, tightening equity regulations and gaining a better handle on cross-border bank supervision. But as far I am concerned, it isn't enough for the industry to develop its own code of conduct. I also want to see the banks no longer allowed to sell all of their risks as they see fit. I think it as a dangerous systemic design flaw that not only loans, but also credit risk is 100-percent marketable. This can lead to uncontrollable wildfires, as we are now seeing.

[Quilly Mammoth]

Actually, Brad, we need two new political parties. One that is open and upfront with it's progressive agenda and doesn't monkey with regulations to achieve it and one that is open and honest about it's desire for true free trade and limited government. Both of the current parties are so tainted with hiding their agenda and paying off cronies that to blame one party over the other is just shrill, silly partisanship.

Not one politician of the current crop in DC has the spine to say that the following three things have to happen: The bad paper needs to be bought, the people who are facing foreclosure (regardless of how they got there) need to be protected and a complete rewrite has to be done of the banking and security regulations to insure transparency.