March 26, 2016

The Frenzy Spread Like A Virus From Block To Block

A Saturday topic starting with this Bloomberg editorial by Noah Smith. “According to mainstream theory, bubbles are not driven by speculative mania, greed, stupidity, herd behavior or any other sort of psychological or irrational phenomenon. Inflating asset values are the normal, healthy functioning of an efficient market. Naturally, this view has convinced many people in finance that mainstream theorists are quite out of their minds.”

“The problem is, mainstream theory has proven devilishly hard to disprove. We can’t really observe how investors in the financial markets form their beliefs. So we can’t tell if their views are right or wrong, or whether they’re investing based on expectations or because of changing risk tolerance. Basically, because we can usually only look at the overall market, we can’t get into the nuts and bolts of how people decide what prices to pay.”

“But what about the housing market? Housing is different from stocks and bonds in at least two big ways. First, because house purchases are not anonymous, we can observe who buys what. Second, housing markets are local, so we can see what is happening around them, and thus have some sort of idea what information they are receiving.”

“In a new paper, economists Patrick Bayer, Kyle Mangum and James Roberts make great use of these features to study the mid-2000s U.S. housing boom. Their landmark results ought to have a major effect on the debate over asset bubbles. Bayer et al. find that as the market overheated, the frenzy spread like a virus from block to block. They look at the greater Los Angeles area — a hotbed of bubble activity — from 1989 through 2012. Since they want to focus on people buying houses as investments (rather than to live in), the authors looked only at people who bought multiple properties, and they tried to exclude primary residences from the sample.”

“They found, unsurprisingly, that the peak years of 2004-2006 saw a huge spike in the number of new investors entering the market. So what was making all these newbie investors start buying houses? The researchers found that one big factor was nearby investment activity. In other words, if lots of people were buying investment properties nearby, it made other people in the area much more likely to buy an investment property. When properties were flipped — bought and then resold quickly — it had an even bigger effect in terms of drawing nearby people into the housing market.”

“This is strong evidence that people were copying their neighbors’ behavior. When people saw other people buying and flipping houses, they started doing it themselves. That stands in stark contrast to the predictions of standard theories of investor behavior, which say that investors only care about the future income that they can earn from their investments.”

“Even more startlingly, Bayer et al. found that housing investors who mimicked their neighbors ended up performing worse than other investors. That is a good indicator that copycats weren’t learning any new information about the fundamental value of housing.”

“What were they doing? One possible answer is herd behavior. Economists have studied herding in financial markets, but their theories are generally unwieldy and their results — until now — have been inconclusive. Psychological effects, such as greed, or FOMO — fear of missing out — are other possibilities. These kinds of effects are regularly cited by financial market participants, but are rarely used in academic finance theory.”

“The Bayer et al. research may change that. The ability to look into local housing markets, and observe investors and transactions directly, is a bit like the introduction of the microscope in biology — it opens up a whole new world of evidence. In the past, finance theorists debated back and forth about market data, and what it implied about investor behavior. Now, thanks to the increasing availability of high-quality data, they can look at that behavior directly.”

“The lesson appears clear: Bubbles exist. Investors aren’t just rational, patient, well-informed, emotionless calculators of risk and return. Now the job is to figure out what really makes them tick.”

The Christian Science Monitor. “If you’re shopping for a house in one of the country’s hottest real estate markets, where the supply of houses is low and demand is high, you may find yourself in a bidding war, with multiple offers pushing prices ever higher. Add low mortgage rates into the mix, and buying a home can feel like you’re in the middle of ‘The Hunger Games,’ competing in a fierce battle to win the house you love.”

“The best move you can make before writing any offers is to hire an experienced, professional real estate agent. Having someone on your side who knows your local market thoroughly — and can guide you through these sometimes tough negotiations — means you’ve got heavy backup when you enter a bidding war. We talked to some real estate agents from around the country about strategies to help you come out on top.”

“Get a preapproval letter from your lender. That way you can pounce quickly when you find the home you want. Use an escalation clause. It’s essentially a contract addendum that states you’re willing to increase your offer incrementally up to a certain limit if other offers come in that match or top your initial bid. Limit the contingencies. Sellers have the upper hand in a multiple-bid situation, and they want offers that are clean and concise.”

“Write a ‘love letter’ to the seller. ‘I definitely ask my buyers to write a letter and explain how much it would mean to them to get the house,’ says real estate agent Eileen O’Reilly with Keller Williams Realty in Burlingame, California. ‘I even have them add a couple of photos of them and their kids or pets. I’ve had selling agents tell me that it was the letter and the complete offer packet that won my clients the listing.’”

“Other Realtors agree. ‘A love letter definitely helps,’ says Paige Martin, a Realtor with Keller Williams Realty in Houston. ‘Even more important is your online reputation as a buyer. Most good seller’s agents will google potential buyers to see if they’ve been in a lot of conflicts or if they have a stable job. While this won’t overcome a large difference (in your bidding price), it will definitely help at the margin.’”

The Associated Press. “The National Association of Real Estate Brokers, a historically black organization, was founded 69 years ago to promote equal access to housing. The organization has launched a five-year campaign to increase by 2 million the number of African-Americans who own homes nationwide. ‘The main thing is that black home ownership does matter,’ said association president Ron Cooper, a Los Angeles real estate broker.”

“Black Americans have the lowest home ownership rate of any ethnic group at 41.9 percent, according to a Census report issued in January. That’s down from 49.1 percent in 2004. ‘We lost quite a bit of equity wealth. We need to rebuild it,’ Cooper said of African-Americans. ‘The message is that the pursuit of home ownership of black Americans is still a noble pursuit. The American dream is within our reach; we just got to reach for it.’”

“The brokers last month held their first midwinter conference in Oakland, California, where skyrocketing home values are preventing renters with modest incomes from buying. ‘There’s a high rate of gentrification going on in the city of Oakland,’ Cooper said. ‘A 1,200-square-foot house is going for a half a million dollars. It’s really kind of pricing us out.’”

“The biggest barriers to home ownership in Memphis are the debt and credit problems of so many families. ‘We go through a lot of clients before we can get one that’s qualified to move on into home ownership,’ said First Tennessee Bank’s Community Reinvestment Act (CRA) officer, Keith Turbett. First Tennessee partners with the nonprofit Operation Hope to provide free financial literacy workshops in Memphis. The bank also offers its Hope Inside program, basing two financial counselors at branches to offer free, one-on-one financial counseling whether the recipients are customers or not.”

“‘African Americans are denied (loans) almost twice as much as whites,’ Turbett said. ‘We’ve seen average (credit) scores of almost 53 points less for African Americans than for whites. So we recognize we have a credit problem.’ Generally, credit scores range from 300 to 850. ‘We feel the 700s is an average, good credit score to shoot for that usually gets you in any loan,’ Turbett said.”

“For the average person, buying a home is the ‘first step to increasing wealth,’ said Regina Hubbard. She’s a broker with Fast Track Realty and was the 2013 president of the Memphis Area Association of Realtors. ‘If you were not born into it, then home ownership is the first step to get there,’ she said. ‘Renting will help the landlord get there, but it won’t help you.’”




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42 Comments »

Comment by taxpayers
2016-03-26 04:10:29

Cra officer”
Race based loans didn’t work out

Maybe Hilary Will have loans for ugly wymin

 
Comment by Hard Rain
2016-03-26 04:12:24

How do they profit? further auctioning to greater fools?

Freddie Mac sells off another $1.4 billion in non-performing loans
Familiar buyer snaps up more than half of available loans.

http://www.housingwire.com/articles/36591-freddie-mac-sells-off-another-14-billion-in-non-performing-loans#disqus_thread

 
Comment by Jake
2016-03-26 05:26:37

“The best move you can make before writing any offers is to hire an experienced, professional real estate agent. Having someone on your side who knows your local market thoroughly — and can guide you through these sometimes tough negotiations — means you’ve got heavy backup when you enter a bidding war. We talked to some real estate agents from around the country about strategies to help you come out on top.”

“Get a preapproval letter from your lender. That way you can pounce quickly when you find the home you want. Use an escalation clause. It’s essentially a contract addendum that states you’re willing to increase your offer incrementally up to a certain limit if other offers come in that match or top your initial bid. Limit the contingencies. Sellers have the upper hand in a multiple-bid situation, and they want offers that are clean and concise.”

“Write a ‘love letter’ to the seller. ‘I definitely ask my buyers to write a letter and explain how much it would mean to them to get the house,’ says real estate agent Eileen O’Reilly with Keller Williams Realty in Burlingame, California. ‘I even have them add a couple of photos of them and their kids or pets. I’ve had selling agents tell me that it was the letter and the complete offer packet that won my clients the listing.’”

“Other Realtors agree. ‘A love letter definitely helps,’ says Paige Martin, a Realtor with Keller Williams Realty in Houston. ‘Even more important is your online reputation as a buyer. Most good seller’s agents will google potential buyers to see if they’ve been in a lot of conflicts or if they have a stable job. While this won’t overcome a large difference (in your bidding price), it will definitely help at the margin.’

One can only come to one conclusion after reading retardation like this: The typical realtor in the field is a clueless incompetent dip$hit.

Comment by X-GSfixr
2016-03-26 08:05:02

I’ve got a theory that says that certain jobs exist, primarily to give the “eye candy” and “cheerleaders” (male and female) something to do:

-Real Estate Agent
-pretty much anyone in HR or public relations
-local TV reporter
-anyone with anything to do with pro or college sports
-most NASCAR drivers who are not Tony Stewart or Mark Martin
-”Entertainment” reporters

Help me out here…….

Comment by Combotechie
2016-03-26 08:10:23

Selling condos by staging foxy chicks in leotards exercising in full view in the condo the next door over.

Comment by Mr. Banker
2016-03-26 08:46:46

Bahahahahaha … if was to want to market some condos that shared a large swimming pool then I would suggest to a lot of foxy chicks that they come to my swimming pool party that I would throw for them (and that they should attend wearing their bikinis) because as a very large plus to them a lot of single millionaire men would be looking into buying some of my condos and just possibly they, the foxes, just might happen to meet a few of them.

Then after the swimming pool area was thoroughly stocked (at no cost to myself) with bikini-clad foxes I would bring to the condos my prospective condo-buying customers who would not necessarily be millionaires but, hey.

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Comment by In Colorado
2016-03-26 11:39:23

The pretty girls who get paid 6 figures to take MDs out to fancy lunches and tell them about big pharma’s latest offerings.

One of my coworker’s sisters does this for a living.

Comment by Jake
2016-03-26 13:58:27

Is there any topic known to man you’re not an expert on?

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Comment by Muggy
2016-03-26 18:20:53

Internet Tough Guy ^

 
Comment by Jake
2016-03-26 18:55:29

No whining FL_Donk. No whining my friend.

 
 
 
 
Comment by aNYCdj
2016-03-27 06:17:11

i remember reading back in 07-08 that there were like a dozen states that didn’t even require you to have a HS diploma or a GED, just pass the test and you got your license.

 
 
Comment by Professor Bear
2016-03-26 07:44:11

“The lesson appears clear: Bubbles exist. Investors aren’t just rational, patient, well-informed, emotionless calculators of risk and return. Now the job is to figure out what really makes them tick.”

What about generationally low lending rates from central banks or epically loose lending standards from mortgage lenders, allowing anyone who can breath to buy a home they cannot afford. Did the authors consider those explanations for a bubble?

Comment by Ben Jones
2016-03-26 08:39:03

I’ve never written a paper on something, but I imagine it’s necessary to focus on a narrow activity to make a point. I’m lucky in that I can identify anecdotal stuff on a general level. The most important things I look for are price, speculative motivation and expectations.

As far as enablers, they are important too. Central bankers used to say, a bubble can’t be seen in real time, only after the fact. This gives them cover to do as they please. Yet we have seen central bankers and government all around the world target over-heating housing markets. And it is worth remembering that Alan Greenspan popped the US bubble.

In the absence of a mania recognition, what do we have? Mainstream economic and finance tinkering. We just need to build more. Loans are too restrictive. Construction in the US is at a 30 or 40 year high. They built entire cities in China and that hasn’t stopped the insanity. Now we have US loans where a person can identify his granny, and a couple of buddys who he says will be roommates, to bring up his “qualifying” income.

Comment by Ben Jones
2016-03-26 09:39:07

‘America is entering a new housing crisis. As opposed to the last housing crisis, in which supply was too abundant, this one will be defined by rising prices because of there not being enough homes.’

‘The CFO of KB Homes, the eighth-largest homebuilder in the US, perfectly sums up nearly all of the problems facing the housing market today.’

“Over the last three years, it’s kind of interesting, our first-time buyer mix has ranged right around 50% for the last three years, and if you put that in the context of how much our average selling price has lifted, I think it’s over $100,000 in that period. It shows you how we’ve been able to flex and find a first-time buyer in these higher income more desirable sub-markets where they have an easier time getting the mortgage and underwriting is getting easier, but it’s not easy yet.”

‘The first thing Kaminski hits on is that first-time home-buyer business is way down. For KB Homes, the percentage of buyers who are making their first purchase has dropped from around 60% to 70% in 2008 and 2009 to just 50% now. Secondly, Kaminski notes that the price point for a first-time homebuyer has increased by over $100,000. This reflects the fact that new housing starts are well below the pre-crisis and historic recovery averages. The lack of new homes has driven prices up.’

So prices are up and sales are down, and you aren’t building as much and that’s making house prices go up. Got it.

What’s not so “perfectly” explained, besides the circular BS, is what else has happened in those three years? Land prices doubled and tripled. Lower priced houses don’t “pencil out.” Even affordable apartments won’t pencil out. All the while affordable apartments are caught up in a giant remodeling/price gouging effort backed by the US government.

Land prices and cheap loans; the bubble right under their noses and almost no one is talking about it.

Comment by Professor Bear
2016-03-26 13:22:32

‘America is entering a new housing crisis. As opposed to the last housing crisis, in which supply was too abundant, this one will be defined by rising prices because of there not being enough homes.’

I wonder about all the recent reports about housing price appreciation slowing or even falling in a number of U.S. markets. Could the KB Homes CFO possibly be full of crapola?

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Comment by The Central Scrutinizer
2016-03-27 12:57:38

If wages are falling too, it makes sense.

 
 
 
Comment by Professor Bear
2016-03-26 13:17:05

“…it’s necessary to focus on a narrow activity to make a point.”

That’s putting the matter generously. Another way to describe it is ‘putting on the blinders.’ The researchers have a hammer, which is a bevy of past peer-reviewed articles on the topic of rational economic decision making, which they narrowly apply to the nail of what drives real estate purchases in a mania.

Not only are central bank and federal government intervention in the housing market off topic, but bringing them into the scope of the research could create roadblocks to opportunities to get published.

 
 
 
Comment by Professor Bear
2016-03-26 07:48:05

‘A love letter definitely helps,’

Dear wealthy and magnanimous seller,

We promise to feed the squirrels daily.

Signed,

Senor Dumschatz

 
Comment by Ben Jones
2016-03-26 07:52:42

‘if lots of people were buying investment properties nearby, it made other people in the area much more likely to buy an investment property. When properties were flipped — bought and then resold quickly — it had an even bigger effect in terms of drawing nearby people into the housing market.’

It’s not a virus though, how is this behavior transmitted?

‘For the average person, buying a home is the ‘first step to increasing wealth…If you were not born into it, then home ownership is the first step to get there’

But in the same article it mentions how blacks lost so much “equity” a few years ago. How is that the first step to increasing wealth? Sounds like just the opposite.

‘Renting will help the landlord get there, but it won’t help you.’

Ah yes, pull out all the stops. Not only are you staying poor, but you are enriching “the man”.

Comment by Ben Jones
2016-03-26 08:00:11

‘you may find yourself in a bidding war, with multiple offers pushing prices ever higher. Add low mortgage rates into the mix, and buying a home can feel like you’re in the middle of ‘The Hunger Games,’ competing in a fierce battle to win the house you love’

Do we talk about buying other things like this? Shortages, urgency, sellers have the “upper-hand”. Write love letters! Not letters telling a seller something they should know (which is stupid) but a LOVE letter. Remember how it used to be? “You are so great at designing the house, I would never change a thing.” You know, personal fawning.

After all, don’t you want to have the “upper-hand” when it comes to money? Haven’t you seen the flipping TV shows, the flipping seminar ads? These guys and gals are getting rich! And not doing much work either, plus they have the upper hand! Is that the virus?

Comment by Neuromance
2016-03-26 08:52:52

Ben Jones: After all, don’t you want to have the “upper-hand” when it comes to money? Haven’t you seen the flipping TV shows, the flipping seminar ads? These guys and gals are getting rich! And not doing much work either, plus they have the upper hand! Is that the virus?

It’s a get-rich-quick scheme pushed by politicians, respectable magazines, respectable TV reporters, spoken solemnly of by important-looking and wealthy men in suits who represent large Olde Companies. It’s pushed by people the society trusts.

But viruses mutate. We know about tulip bulbs, which yield very little value from consumption, and we know about stocks which have no consumption value. The value from these items is that they yield a net profit upon sale.

Houses however, also yield a value from consuming them. So the meme is, “We can improve our standard of living and it’ll make us rich? What’s not to like?”

That’s the meme/virus it seems to me.

The reality of course, is much more complex. I suspect few individuals are able to accurately tally the actual result to their net worth as a result of the purchase+sale of a house. Houses have many hidden costs, obvious and non-obvious. The purchase/sales price difference is just one of those.

Comment by Neuromance
2016-03-26 09:30:00

It’s a get-rich-quick scheme pushed by … people the society trusts.

This called “reputation mining”. It’s role is talked about in a book I just finished: “Phishing For Phools” by Shiller and Akerlof. It’s an excellent book, I highly recommend it. I don’t totally agree with some of their points, but I don’t think I ever have totally agreed with a book.

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Comment by Neuromance
2016-03-26 08:23:50

Ben Jones: It’s not a virus though, how is this behavior transmitted?

I think it’s an evolutionary trait. Think of this: A herd of quadrupeds is running. They could be running from a lion, or it they could be running because they were spooked by a cloud, or they could be running towards a cliff. The one that sees the herd running and takes off with them might be saved from the lion, but if it stops and tries to identify the source of the stimulus, it might itself be eaten. On the other hand, it will avoid death from jumping off cliffs. More likely it will be eaten, so less of this type of quadruped exists.

I think with people, there is a similar dynamic. A strong tendency to move with the herd, do what the herd does. Those who stop and consider why the crowd is running or why everyone is doing something a certain way may be eaten or may starve. Or they may not. Maybe they’ll avoid getting food poisoning, or plague, or maybe they’ll find a better way of doing things. But in general, probably not. Moving with the herd likely has strong evolutionary reasons.

Comment by Blue Skye
2016-03-26 10:09:51

There’s more than monkey see monkey do. When you hear people say something a few times, it is easier to accept that than to think things through on your own. Thinking takes too much energy.

Comment by The Central Scrutinizer
2016-03-27 13:00:44

I think people try, but most simply cannot utilize the basic principles of critical thinking. They ‘think’, but it’s a bunch of random spaghetti logic that ultimately settles on the decision dictated by their prevailing emotion.

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Comment by Sean
2016-03-26 13:00:31

‘For the average person, buying a home is the ‘first step to increasing wealth…If you were not born into it, then home ownership is the first step to get there’

Someday, someone will have to sit me down and explain this phrase. How does spending your money increase your wealth? You don’t get rich by spending your money, you get rich by saving your money.

Comment by Jingle Male
2016-03-27 04:30:20

When you buy at the bottom of the housing cycle, your cost is likely equivalent to rent. Your payment includes principal reduction, which for many is a forced “savings plan”. There are other benefits to, like tax deductions for owning, price appreciation, stability from eviction and higher rents. Home ownership can be an important financial tool.

It can also be a disaster for people who cannot understand simple financial concepts.

Comment by Jake
2016-03-27 08:19:21

There hasn’t been a housing cycle or a housing cycle bottom in well over 20 years.

Yet you rolled the dice anyways Jingle_Fraud.

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Comment by X-GSfixr
2016-03-26 07:54:48

So, they did a study and discovered that if people see their friends and neighbors making a killing off of real estate flipping, they will copy the behavior.

Gee, what a shock……..

I need to apply for a grant to travel the world, and prove that the sun rises in the east no matter where you are at.

Comment by Ben Jones
2016-03-26 08:24:09

It’s more instructive than that:

‘According to mainstream theory, bubbles are not driven by speculative mania, greed, stupidity, herd behavior or any other sort of psychological or irrational phenomenon. Inflating asset values are the normal, healthy functioning of an efficient market.’

They looked at buying multiple houses as investments and flipping and sought to prove it was a sign of a bubble. Don’t we have some people on this blog doing that and denying it’s a bubble? What is a bubble to them? 2006. Subprime. That guy from CHIPs on the TV telling us about Arkansas houses. If it isn’t exactly like 2004 or 5 or 6, it isn’t a bubble.

I had a headline quote once that said, if there’s flipping going on you have a bubble. Now we have hedge fund guys trying to flip $100 million Manhattan condos. We are seeing skylines transformed all around the world with “safe deposit boxes” that aren’t being lived in. This defining of a bubble is important, because we have a lot at stake and powerful interests trying to tell us this is all normal.

Comment by alphonso bedoya
2016-03-26 19:24:24

You hit on an important point. One needs to define a bubble before you start calling everything a bubble because it’s NOT to one’s liking. “Flipping,” in and of itself, is not a bubble. It’s a subset of a distortion that Grenspan realized he unknowingly created and then warned about.

Physics is applied mathematics and Greenspan faltered in not seeing all the parameters that came into play, AND, firmly believing he could control those he saw in play.
One always needs to look for the LARGER context before labeling a phenomenon.

Creating a “distortion” in price ARISING FROM a compression in its time horizon leads to a bubble. (Greed and impatience feed the phenomenon.)

My grown sons are smart millennials. They know the system is out there looking to game them. “As soon as the baby boomers begin to die off,” they tell me, “things will improve.”

Comment by Jingle Male
2016-03-27 04:45:22

That’s a long time horizon…30-years or so. You could have your mortgage paid in full by then.

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Comment by The Central Scrutinizer
2016-03-27 13:02:03

Well, be careful in the east in the morning. You don’t want to get burned up.

 
 
Comment by Combotechie
2016-03-26 08:04:38

“This is strong evidence that people were copying their neighbors’ behavior. When people saw other people buying and flipping houses …”

… meaning buying and then immediately selling what they bought at a higher price …

“… they started doing it themselves. That stands in stark contrast to the predictions of standard theories of investor behavior, which say that investors only care about the future income that they can earn from their investments.”

“investor behavior” Oh, so now we are talking about investor behavior; I thought we were talking about flipping houses - buying at one price and then immediately selling at a higher price.

If these guys think that the mentality that drives people to flip houses (or stocks or whatever) is the same (rational) investor behavior mentality that is taught in Econ 101 then they need to get out a bit more often.

Econ 101 deals with prices that are attached to values, values that are in turn attached to fundamentals of some sort - meaning that fundamentals determine values and prices determined whether these values are “overvalued” or “undervalued”. If a price rises above a perceived fundamental value then demand will drop off because the price will be seen as “overvalued”. Same goes with prices being seen as “undervalued”; If you want to increase sales then price your product at a point where it is seen as being undervalued. Macy’s does this all the time. Econ 101.

But a flipping market is not a Econ 101 market; A flipping market - a speculative market - is a market whereby values have become detached from fundamentals and have instead become attached to prices. It is a market whereby the price itself denotes the value and in such a market rising prices signal that values are rising.

In an Econ 101 market, a market where values are firmly associated with fundamentals, a runaway price rise could not happen UNLESS the fundamentals themselves begin to run away which is unlikely to happen because fundamentals in most markets usually do not change all that much.

But when it is seen that price equals value then there is no restraint applied by any change in fundamentals because fundamentals (if they exist at all) are not looked at, are not considered. The only thing that is considered as a measurement in a price-equals-value market is the CHANGE in price. If the change in price is increasing then that means that the values are increasing, and increasing values is the draw in such a market and the greater the change in price on the upside the greater is the draw. And this works until it doesn’t, the draw of rising prices works until prices stop rising.

The draw of rising prices works as long as prices keep rising because the values generated by rising prices keeps on getting larger and larger as prices keep rising, and even though these values are totally dependent on prices (which are in turn dependent on the actions of strangers - and lenders, and governmental policies) these values are real enough that they can be cashed out and spent, and they can be assessed and taxed, and they can generate inputed rent which can go into the calculations of GDP - so this whole idea of price equals value has a lot of supporters and very people who are against the idea.

Logic would suggest that there is at least one group of people who would be against the idea of ever-increasing prices and this group would be the buyers - the group of people who have to pay for these ever-increasing prices - and again this where logic fails because it is the fact that prices are increasing that draws this group into wanting to buy, of desperately wanting to buy, because they see such a market as a buy-now-or-be-priced-out-forever market and in such a market prices can never be too high because prices will never stop rising.

And logic would also suggest that prices will have to someday stop rising because at some point prices will rise to a point that they will be so high that nobody could afford to buy them and this would ordinarily be true EXCEPT the high prices themselves are not paid by the buyer, instead a COMMITTMENT to pay the high prices is what is paid by the buyer, a commitment made by the buyer that allows the seller to immediately get his selling price without at the same time requiring the buyer to immediately pay it.

 
Comment by Neuromance
2016-03-26 09:02:32

Part of this bubblenomics is driven by the belief in “secular stagnation”. Krugman and Summers have not-so-jokingly said bubbles are the only way out. Here’s an interesting quote:

“You’re right the United States has a serious demand deficiency. You’re right that not enough is being done to contain that demand deficiency. You’re right that we will suffer needless unemployment and stagnation until more is done to address that demand deficiency…”

How on earth can the US have a demand deficiency when the population is maxed out on debt? They’re spending everything they have and yet have taken on vast amounts of debt? How is that a demand deficiency? They’ve spent everything they have and they’ve spent huge amounts of future earnings!

And it’s a demand deficiency? Methinks there’s some flaw in their understanding of the economy.

Comment by Neuromance
2016-03-26 09:33:30

Methinks there’s some flaw in their understanding of the economy.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” — Mark Twain

 
Comment by X-GSfixr
2016-03-26 09:47:27

There’s a “demand deficiency” because your average J6P hasn’t had a “real” raise in pay since about 1975.

And contrary to some assertions, most people won’t borrow money if they dont think they can pay it back. Even the kids are wising up to the fact that spending $200k for a degree is idiotic, if the training/degree doesn’t get you a job that pays more than $15/hour.

Millions of people aren’t drawing paychecks. Millions more are working part time. Millions more are working, but sending their checks back to the homeland. Millions more have recognized the fact that they are just a slowdown in the economy away from joining them. The only people who have any “job security” are those working for the Federal Government (directly or indirectly), or those businesses that government has decided to nuture/support/bail out (finance, health care, insurance).

Its basically idiotic. The oligarchs engineer a wealth transfer from the middle class, while at the same time implementing a tax transfer scheme onto them. Then the morons wonder why no one has any money to spend.

Comment by Neuromance
2016-03-27 11:31:39

On top of all that, they engineer government-insured debt bubble, then act puzzled about the lack-of-demand hangover. And consider yet more novel ways to fix the problem they created in the first place.

 
Comment by Neuromance
2016-03-27 11:32:56

There’s a “demand deficiency” because your average J6P hasn’t had a “real” raise in pay since about 1975.

The interesting thing here is that while the upper earning stratas of society did benefit from the debt bubble, 80% of the society did not, and in fact were saddled with the costs.

 
 
 
Comment by Bluto
2016-03-26 10:34:55

Good article from today’s NY Times on reasons why people generally think they are much better investors than they really are…

http://www.nytimes.com/2016/03/27/your-money/why-we-think-were-better-investors-than-we-are.html?src=me

 
Comment by Ben Jones
2016-03-26 13:42:42

I came across this:

‘Iraqis Step Up Protest Against ‘corrupt Elite’ of Baghdad’s Green Zone’

‘By one estimate, there are 25,000 Dawa Party members that run the government and have accumulated great wealth in the past decade. “Property prices in central Baghdad are as high as in London because there is so much dirty money looking for an investment,” said an Iraqi economist in Baghdad who wanted to remain anonymous.’

 
Comment by Senior Housing Analyst
2016-03-26 14:03:48

Eagle County, CO Housing Market Nosedives; Prices Plummet 22% YoY As Housing Fails Nationally

http://www.zillow.com/eagle-county-co/home-values/

 
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