bostonbubble.com

[admin]

I read this interesting post a few days ago which draws the surprising conclusion that there has historically been no relationship between mortgage rates and home prices (see Figure 5):

http://mortgagenewsclips.com/2009/04/22/ira-artmans-sterling-slivers-no-news-is-no-news-banks-home-prices-and-home-sales-are-just-fine/

Perhaps the temporarily decreased cost of capital during periods of low rates is generally counteracted by increased economic and employment uncertainty and by increased risk of interest rate increases (which would impact the eventual resale).

- admin

[GenXer]

See that spike in 1982 that went from 9% to 18%, and a corresponding collapse in turnover from 9% to 4%?

The analysis they are using is probably wrong. Linear regression is inherently Gaussian, and does NOT apply to those variables which are NOT Gaussian. By 'gaussifying' data they are in fact creating and/or destroying relationships in the two data sets. Unfortunately, we do not have easily available tools to do analysis if the data is not Gaussian.

Case in point: some seemingly uncorellated asset classes collapsed together for no reason at all, but it happened for whatever reason, and at the worst possible moment they became 'correlated'.

Bottom line: if you do not know that two data sets are Gaussian, DO NOT use linear regression and/or any other statistical tools which are KNOWN to be 100% wrong if the data is not Gaussian. Their conclusion is probably incorrect. Just because their tools did NOT find a relationship, does not mean that in SOME cases (especially when extreme deviations occur) a relationship is not there.

[admin]

My thought was that the correlation is more complex than just the mortgage rate and prices at the same point in time. I would expect some sort of delay between when mortgage rates change and when prices are affected, if only because it takes a lot of time to go from the initial motivation to start looking to the eventual closing. There is also the time needed for the price signals to propagate. Changes in the Fed's rate have a lag in affecting the economy (around a year, I think), so why not a delay with mortgage rates too? I also think that expectations of future rates matter as well (e.g., prices may have a further fall ahead if current mortgage rates are temporary) and that would factor into the correlation as well if enough participants are rational.

- admin

[john p]

I think I need to reread that a few times.

I think that a straight up the fairway approach might be to take a house type that you like in your target market and see what that house sold for throughout a range of years. Each year that a house like that sold figure out the prevailing mortgage rate to determine what a monthly payment is, that is what I call the hurdle height.

My findings (limited market areas) told me that the hurdle height seemed to move at a height not too far off of inflation. The reason why I think that the prevailing monthly payment is the best measure is because you can never get a significant amount of economist to tell you with a high degree of certainty whether mortgage rates are going up or down or house prices are going up or down. Looking out the winshield is different than the rear view mirror. From a windshield view most people go with what they can afford at the time they purchase because they have no idea where the economy is going to go with much certainty. If you expect more from them, ask yourself how so many Wall Street Ivy League experts blew it big time.

As mortgage rates dropped, families could afford more house principal. Of course house prices would need to come down if the cost of capital went up, but who knows the laws of economic gravity? The laws of economic gravity are MAN MADE. Obama's economic approach defies gravity because he's adding liquidity and defining the laws of the jungle and the biggest, baddest nation can do whatever it feels like doing. Specifically what he is doing is making other nations mad, he is manipulating our currency for a self serving purpose. He went on tour to lock in political sentiment, a very smart move. The currency manipulation adds uncertainty and uncertainty is risk because people have no idea about the load bearing capacity of the economic system.

[GenXer]

john_p: Retrofitting arguments to past data is often counterproductive. It does not add new information, unfortunately, and it is the only way we as humans seem to 'explain' the randomness we experience.

However, you are right - some things do not make sense, and just because we are not torpedoed right away by Obamanomics doesn't mean the reckoning won't come someday in the future.

admin: The rationality argument does not work. Unfortunately, most market players are not rational in the academic sense. Actually, herd mentaility is more like it - causing bubbles and bursts. This may actually be responsible for the extreme random deviations we observe.

[admin]

[john p]

I see logical echos. Think about how people first built garages for their cars, they put them in the back of the lots where people typically had their horse stables (too keep the smell away from the house). Then, they designed the cars to look like carriages intially. Eventually, it takes a recognition that things are different before people shift gears.

I think that you need to always think about the context that decisions were made, mostly the pedestrian, conventional wisdom (rear view mirror memory) because that plays a big role in how people move forward. I'm not saying this is the right way to go about doing things but if the masses operate this way, you have to take meaure of it.

I mean they ask Warren Buffet what he thinks will happen and he's like "Gee, I don't know". Nobody knows for sure. What frustrates me is that people evaluate people who bought during the bubble as morons when I know pretty dam well that the current crop of buyers are just at the right place at the right time and most likely would have pulled the trigger if they were at a certain point where it is time to growing the family. I mean we are human and we have a limited window to have kids and get established in a community, and sure you can rent, but are people expected to wait a DECADE to buy a house and wait for things to settle down to "historical norms". I mean what are historical norms? I see them as a general affordability level. I mean back in the days of "historical norms" many didn't have life insurance, we didn't have medical procedures to extend people's lives like the stents they put in hearts and arteries to prevent early deaths due to heart attacks. This whole new product offering costs money. I mean people before didn't have cable t.v., they didn't have lap-tops, I-pods (only the rich kids had Walkman Radios), now even young kids have cell phones. This doesn't align with historical norms.

The fact is, we have gotten poorer countries to make our stuff and that has increased our quality of live for quite some time. The party is over now. The wealth we sent to these other countries has helped them build modern civilizations that are less willing to make stuff for us for the price of rice.

That was a great link someone posted recently about oil. I mean that is a sign of the times that we've awaken India and China and they are now up and running in a modern world. Iran and South Korea want nukes. Remember what I said, we have people looking through the winshield with a rearview mirror outlook. We have societies that are mentally old world, chopping off hands for shoplifters, men putting veils over their wives, now coming close to having nuclear weapons. I mean we weren't perfect when we first had nuclear weapons, we had them in 1944 and we were firehosing african americans in some areas of the country. The more I research, the more I realize that historical norms are not exact. Are we going to look at historical norms when only a small percentage of the population went to college, fewer people could actually read and write, etc.? That being said, are we going to look at price movements or fluxuations in the same manner? I mean in modern times, don't things deform and change more rapidly?

I guess my frustrations are in that many people have these faith based outlooks and plattitudes, like "things always seem to work themselves out..." Hell, Alan Greenspan says them with the whole "The US Economy is resilient and figures a way out..." Although this speaks to the properties of the social fabric, this is also a rear view perspective. It is kind of like saying A36 steel has a yield strength of 36,000 psi and because of that we can PREDICT the behavior of it. My point is that if you change the mixture and values of a social fabric you also change the structural properties of it as well. I mean do you think that the "Greatest Generation" the kids that ran to enlist after Pearl Harbor is the same as the young kids today who feel entitled to cell phones, MP3 players, laptops, credit cards, cars, etc. etc. The way I predict the future is also by looking at the social fabric and how much load they can take. Ask yourself what would Martin Luther King think of some of the things that Chris Rock says; then think about how main stream Chris Rock is and how very little people throw the penalty flag at him. That tells me that we have regressed and gotten weaker since Martin Luther King. I think that people valued freedom because they had to fight for it. People worked harder because they had to to eat. I think we need to look at how soft many have become and then see the challenges we have ahead of us. We have rationalized and kept out of our view all the sweatshops we have supported when we buy foreign stuff from emerging nations, so how much of a leap will it be to say that we either strengthen our core and find the strength to support ourselves or we'll be forced to rely on others and become predators. So when you think about "historical norms" think about if we've maintained an A36 strength of steel or not.

How this relates to housing is that if someone got a quick $200k appreciation between 2000 and 2005, they will be less attached to that money in a loss than if they had earned every penny of it. Easy come, easy go...

[Boston ITer]

Well John, here's a point where I'd try to contend for the notion that sometimes foresight can be close to 20/20.

When I'd started my 1st internship, I'd realized that much of the workforce was not grounded in the fundamentals of most of the arts & sciences. That's when it had occurred to me that I could have gotten a mail order (ok, cheaper correspondence) degree and still have functioned at the top of my key. Here's what stopped me... I had a pretty decent scholarship so my carry costs for college were fine. It was obvious to me that a college diploma was a *white collar validation* program than something of intrinsic value. One learns for the sake of learning, a college can't make that happen for anyone except to keep one in a pipeline of a curricula.

Today, it's totally out of whack (debt burdens of $70K to $150K) but yet, kids still attend. I'm yet to meet one who's considered a part-time correspondence degree, at half cost, or even less, like London Univ distance, serving the Empire for 1.5 centuries. Granted, places like Northeastern gave great co-ops but on the average, most universities aren't like that and from what I'd gathered, a quarter of the top applicants can get a NEU scholarship for the first year or two. That's a reasonable deal & perhaps an exception. So again, just like houses, why aren't parents and society in general, protesting this? If I were 18 today, and I didn't have a near full scholarship, I'd opt for a correspondence degree and work part-time.

[Guest]

If my kid will ever have a desire to go study at a liberal-artsy-fartsy-no-curriculum-elite-school with no grades for the heck of experience and 100+K in debts and no applicable skills, I'll tell him that he is on his own financially. I am not paying for this experience. He's gonna go either to a state school, or study abroad (he is EU member). It is not where you get a degree, at least undergrad, it is what you do with it.

People, especially in this country have a huge sense of entitlement, just because, they supposedly work hard and they deserve to: have the largest cars, homes, exotic vacations, newest gadgets, toys, most expensive education you name it, because that's what's been drummed into their heads since the Cold War. Live the American Dream baby, you deserve it, just because.

[GenXer]

Boston ITer: Great point about the cost of education. My kids will most certainly be home-schooled, and will hopefully be able to learn on their own with our help without needing a $200k mortgage to afford it. Of course, online degrees are the thing. Almost all high quality engineering universities offer these right now (including some ivy leagues). Northeastern offers it too, by the way. You can easily spend a lot less time commuting and sitting in class, and a lot more time actually learning.

john p: The wealth redistributes itself - no need for socialism. Those people you mention will lose the money to the next group, who will do the same. Only those with adequate planning and legal protection, as well as skills which are marketable, will be able to safeguard and pass on their wealth. Those who have done the right thing from the start are laughing all the way to the bank right now (at least they are not hurting at all compared to those who are one paycheck away from bankruptcy).

Guest: USA does have the best education in the world, but NOT for the same reasons as the former Communist block, which has some of the best quality scientists and engineers. We have the best education because we are free to pursue what we like and we are not all stuffed in a class and told what to do (at least, not in the technical fields). We are allowed to be creative, and this is why USA has the more Nobel prizes in science than the former Communist block countries. We also have a lot more opportunities to apply ourselves by implementing technology directly without (much) regulation and middlemen. Not so easy in many other countries in the world. At the same time we have a less educated population than in some of the Communist block countries. Under careful examination, this is not a paradox, but a fact of life -USA is probably the most diverse country in the world, and freedom needs responsibility to enable success (on the flip side, lack of freedom leads to lack of desire to be creative).

[nickbp]

[balor123]

Juding by properties in New England, it also seems to keep the city from condemning your house when your garage turns to junk.

Don't people like garages here? I don't get it.

[john p]

I guess many of these early automobile garages were originally stables that were converted. They were worried about explosions... wow, that makes sense. As an architect we see lots of carried over gestures. In the book the "Fountainhead" it talked about how we made metal and steel elements to resemble things that were built in stone, that were made to resemble wooden structures and wooden construction assemblies...

The assemblies and rules of thumbs of the past are often carried forward. There was also this book called the "Guns of August" where it talked about how people were using the military knowledge of past wars to deal with new ones even though the technology and capabilities were totally different. The current war on terrorism has two sides that are in entirely different eras.

Obama is making the playing rules metamorphic. It is like going to a casino and having the odds change without warning or having a full house beat a straight one minute and then changing the rules to have a straight beat a full house the next. People don't know what the rules are. Imagine going to a casino and hearing over the intercom, Oh, people the $5 chips that you purchased are now worth $4.5 because we wanted to help out some of our selected guests. Would you go back to that casino if that is how they did business? This is what is going through the minds of many investors right now.

[nickbp]

[GenXer]

john p: Exactly. The government is messing with the markets, and that has always been the case. The proportions are different now - we can not even comprehend these proportions anymore.