Wednesday, September 05, 2007

2007 Economic Symposium Papers

You can find links to some of the papers delivered at the 2007 Economic Symposium in Jackson Hole here.

The paper by Shiller argues that the housing bubble was not caused by fundamentals but rather by speculative psychology run amok. Here is the first graph from that paper to whet your appetite:

Any questions?


Blogger Matthew said...


As always, thanks for this interesting post and subject... I look forward to reading some of the reports in more detail..

I know there was some graph poking going on in your last post, but all that garbledegook missed the point.. homes are assets and this asset class appreciated in price more in the last 6-7 years than anytime every in the US history by a wide margin... I've yet to hear a rationale explanation supporting this price increase on a fundamental basis.. there is none, so prices will correct severely to the down side.. the question is how long and how fast..

All this discussion on capital markets and lending and interest rates are distractions from this basic fact.. home prices are much too expensive and due for a severe correction… everything that these housing bubble blogs have predicted so far has played out and so will a price correction.. no doubt..

At the most elemental level of all this, a person needs food, clothing, shelter and transportation to survive.. that person has a certain amount of skills that he or she brings to the market place to earn enough money to meet his or her needs to survive… that balance between his or her skills and resulting salary and the cost of his or her survival is out of whack… way out of whack.. not for long..


Sep 5, 2007, 9:09:00 PM  
Blogger Marinite said...

At the most elemental level of all this, a person needs food, clothing, shelter and transportation to survive..

I can't wait for the capital markets to securitize food and clothing so we can have bubbles in those too. I've already been stockpiling socks and apples.

Sep 5, 2007, 9:14:00 PM  
Blogger mrlmv said...

Matthew - Schiller's is a good read - I think his thesis is wrong/silly, poorly supported and overlooks key data... but other than that... ;-)

Here's the problem - he spends a lot of time debunking something that most financial people already know - which is that fed policy and fed rates have limited impact on housing prices... this is not news...

And since housing "fundementals" which he defines as rents and construction costs are flat while home prices have risen - its not changes in those fundementals that underpin the rise in prices as "some have speculated" - who those "some" are is an open question..

So if its not those two things in his mind then it has to be mass psychology which is the root cause... and the trigger for those psychological driven booms - well its not really anything you can quantify so you'll have to trust me - oh yeah, and the trigger could be anything - in the 50's it was a war scare - but apparently by the time the Cuban missle crisis and Vietnam rolled around war scares didn't trigger speculative housing bubbles. In the 70's apparently the populace was driven to irrational mania by a Joni Mitchell song to buy up farmland... Serious.. he actually posited that the "paved over a parking lot" song's longevity on the Billboard charts contributed to the pychology driving bubble farm prices...

On the other hand, in his conclusions, Schiller unironically tosses off that many of these psychological speculative episodes have been hand in hand with institutional change in the market - no discussion of what came first the mania or the institutional (what I would call a fundemental structural) change...

The potential that the psychology was a result of events set in motion by those institutional changes is never considered.

He is equally disinterested in other data that, while thought provoking, doesn't fit his thesis - and therefore is presented without any critical analysis. For instance, and I think this is highly relevant to Marin, he notes the ongoing shift of the distribution of value from structure to land that has occured over the last 10 years but doesn't discuss it critically except to point out that it must be as a result of psychology because construction costs have been flat since this trend emerged in the early 90's. Of course this is in contridiction with his assertion that the bubble started after 1998... One very rational explanation for this is that many of the most desirable inner ring suburbs of major metros - the ones that have short commutes to money centers where folks can make lots of money - have run out of raw land upon which the housing stock can expand - putting upward pressure on the land prices because construction costs are pegged to labor costs which are stable and constant across markets... meaning that values are rising while structure costs are not. Places like Greenwhich, Tiburon, Lake Forest, Pacific Palisades, Chevy Chase, etc. 10-20 years ago you could still buy land in these towns - which, along with a number of other factors, helped hold prices in check by expanding the housing market soaking up any population driven demand - now, at least in So. Marin - raw land is mostly unavailable - that which is left is less desirable than most of what has already been built up - in short these towns are full. AT the same time the trend toward urbanization of the population and general population growth would dictate that any excess demand goes to drive up the price of the land - because construction costs as we just discussed are flat. BTW I am not saying that my speculation about why there is a shift from structures to land is right - just that he never considers that obvious possibility. Instead he notes the anomoly and then chalks it up to something no one can measure instead - which is convienently aligned with his "theory" about psychology driving pricing mania.

The irony is that despite the love Schiller gets on this forum - he actually makes some points that I have been trying to get out there - but that he and the forum like to ignore.

First is that concept of institutional change as a harbinger of changed pricing norms instead of, or more likely in combination with, buyer psychology as a driver of pricing growth... If none of the change in pricing can be attributed to the institutional change - then using a historical precident upon which to base your analysis of future pricing would be valid - if not - then the challenge for those that feel compelled to figure out the market - is to sort out how much of the price change is mania driven - and therefore subject to the historical precedent and how much would be attributed to the institutional change - and therfore permanent...

I would argue its the latter - that there is a mix - and therefore merely using historical precidence will lead you to conclusions that are overly dire. Does the institutional change represent 10% of the price growth - 50%? 90%? - I have no clue... but there seems to be here an unwillingness to consider that insitutional change might have an impact on prices at all - even if its just a partial impact. I assume this is because it would undermine already staked out positions that stupid greedy buyers are all to blame...

Luckily Schiller makes my point for me - its right there in his paper. Essentially, Schiller argues that house prices always decline at the end of the boom and uses that as his foundation for his dire prediction of post-boom correction - except in one of the three booms he discusses in depth, the case of 1950 they don't. You can see on his chart - the NY Times one posted here last week - that prices have never retreated back to 1950's levels after that boom. In fact the closest you can come to arguing that after 1950 there was a bust is that prices seem to decline by 5% over the course of 10+ years as the index goes from 115 at the peak of the boom to a 110 stasis which has been the baseline for the market ever since.

This is hardly the definition of the a bust - especially in light of at 20+% run up as a result of the 1950's boom.

Schiller doesn't even note this - there is no discussion of what about 1950 might be different from 1970s or 1980s... instead its just glossed over in favor of War fear psychology...

Let me take a shot at this... perhaps that systemic price change of the 1950's boom that never busted might be a reflection of widespread access to loans that are 30% longer than what was previously available to buyers - thereby making the same income able to buy more house.

Those 30 year term loans also became the standard by which loans were made right up until CDOs came onto the seen in force in the late 90s. Which is a strong argument for why slightly below the top of the 1950's boom is where the market settled for that era.

Is it possible that the shift in capital markets - a lasting expansion borne out of new lending practices - might be just a teeny tiny bit responsible for the rise of his index to the post-1950 baseline of 110 rather than "war fears". And that the longevity of that move to 30 year loans might just be a teeny tiny bit of the underlying responsibility for why that boom didn't bust - or why we haven't ever returned to pre 1950's prices on a normalized basis?

Finally, if indeed a shift from 20 year terms to 30 year terms is an instutional change capable of being a driver of a 20+% systemic change in housing prices - is it that far fetched to argue that some of the current boom might be attributed to the institutional change represented by CDOs? Even if you strip out the excesses of CDO lending that institutional change is going to persist.

That is my point - not that its all different this time - its been the same in the past - just that its different from those times when there wasn't institutional change as a component of pricing increases. And not that all of the pricing increases are associated with the institutional change... how much? I don't know - but its certainly not all - which would portend some drop in prices in relative terms factoring out inflation - how that looks in real terms with inflation back in? Dunno.

- thereby fu

Sep 5, 2007, 10:52:00 PM  
Blogger mrlmv said...

Marinite - Securitized food and clothing are called futures... well the clothing would be cotton futures, or... I guess oil futures nowadays.

They have been around forever... and yes they are subject to speculation...

Sep 5, 2007, 11:04:00 PM  
Blogger mrlmv said...

Matthew - Why is transportation an elemental need for survival?

Food, shelter and clothing...

Sep 5, 2007, 11:08:00 PM  
Blogger mountainwatcher said...


I see you have an amazing amount of knowledge about economics and market forces.

What is your prediction for Marin house prices over the next five years?
How about Mill Valley homes?

Sep 6, 2007, 12:16:00 AM  
Blogger Holland said...

According to today's article on Bloomberg:

"The shortage of funds in global money markets has worsened since the Federal Reserve and the European Central Bank tried to ease a squeeze on interbank lending, according to Barclays Capital."

Sep 6, 2007, 7:25:00 AM  
Blogger marinite2 said...

thereby fu

What does that mean?

Sep 6, 2007, 9:46:00 AM  
Blogger marinite2 said...

They have been around forever... and yes they are subject to speculation...

Great. So when do we get to see a doubling in the pricing of socks and the fear that we should buy now or be priced out forever? I've got a garage full of them just waiting to make a killing.


Sep 6, 2007, 9:48:00 AM  
Blogger sf jack said...

"What is your prediction for Marin house prices over the next five years?

How about Mill Valley homes?"


Oh... I'll take this one, though I feel more comfortable talking about incomes and house prices.

I suppose it's possible that "institutional changes" and the "wealth growth factor" could account for the fact that the median household income to house price multiple goes up over time in Marin and the rest of coastal urban California (used to be 3, then 4, before 2004-2006 craziness, about 6; now in southern Marin, over 10).

However, we have seen that with every recent bust it retreats somewhat from a peak value. Perhaps by a quarter, or maybe even a third or so.

(For historical purposes, you can see the data for this in at least one of marinite's charts and graphs from early on in this blog; see:
"Marin County House Price Adjusted by Income for the Years 1969 to 2004" - a decent proxy for household income using per capita data)

Is this time any different?

In Japan, where real estate was impacted by "institutional changes" and the "wealth growth factor" on the way up to 1989... house price declines, for many reasons that may or may not play here, ensued for 15 years.

Given that, I can only say that Mill Valley house prices will be impacted by recent events for "a long time."

Sep 6, 2007, 10:47:00 AM  
Blogger mrlmv said...

Mountainwatcher - Ahhhh hell... I don't know. I doubt anyone knows with any certainty. Particularly in light of the growing complexity of the market.

Trying to top tick or bottom tick the housing market is a waste of time in my estimation because of the high transactional costs of buying and selling homes... Buying a home to live in should be lifestyle choice first, investment decision second. People often lose sight of this. People also have unrealistic views of what they are entitled to when home shopping - unwilling to make sacrifices they either end up taking stupid risks (some which have been enabled by the loose lending regime of the last 4 years), or they sit on the sideline grumbling because someone won't sell them a 4 BR home in Tiburon for $800K when according to their analysis that's what the home is worth.

Okay enough with the PSA. Two last qualifications before I try to weasel out of making a prediction. 1.) I make no warranty with regard to any guesses below - they are strictly my opinion of what's going on and should not be construed as advice on the market. Every buyer or seller has their own individual circumstances to consider when undergoing a transaction, and as such no blanket assesment of the market will be correct for their situation. Buyers should do their own research in light of this as it may lead them to different conclusions. 2.) I have been wrong before when making predictions, I expect I will be wrong again in the future. For instance, after we had the labor market here get shelled by the dot com bust I expected the air to come out of home prices... which they did for about 10 minutes. I totally missed implications of the CDO explosion - partially because I wasn't really paying attention to how fast that change was occuring. That by the way is why predicting investments is so hard. It's the unforseen that trips you up. If everything really always did happen as it has in the past then a monkey could make money investing. The problem is the time when it doesn't - then what? And the problem there is how do you know this is the time it different? That's where the hard work comes in.

There have been numerous examples of "the time it was different" throughout history - for instance stagflation... there's a market that acted in a way that it had never before and which many though was impossible.

Another challenge is that you can be right theorhetically but dead wrong in reality. For instance, our beloved Prof. Schiller wrote a book in 1996 about how we were experiencing a speculative bubble in the stock market - specifically NASDAQ. He was right - but only off by 4 years. By the time his theory played out - the NASDAQ had risen to over 5000 - even post bubble it stands well above the point where he argued it was in a speculative bubble - today the Nasdaq is 2600 and at no point since he made that prediction has the NASDAQ even come close to 1000. The worst you could have done by doing exactly the opposite of what Schiller was predicting (that is investing in the NASDAQ when it was 1000) would have been to make 20% over the course of 5 years... and you would have had to be very unlucky to do that poorly as the NASDAQ only reached down that low for a few weeks in 2003.

Okay - enough stalling.. My sense is that home prices are overheated in Marin - whooo, glad to get that off my chest. I am almost certain they are not as overheated as Matthew thinks they are. I am not even certain that they are overheated enough to overcome the frictional costs of a transaction if you were a current homeowner looking to capitalize on an impending drop by selling and buying back in later - particularly in light of higher borrowing costs. Personally I think that's fools game.

In my estimation, how much the market is overheated depends on a couple things - first is how much of the run up has been due to bad loans - not "exotic" loans but bad ones that homeowners cannot repay and where equity coverage is insufficient to allow them to wiggle out. I don't know this. I think its easy to say that everything from 2004 on is a result of crazy lending practices - but I think that is overly simplistic. Lots of good loans were made during that time as well - loans that won't default. One would assume that investors will sort that out over the next year or so capturing that liquidity for the market. Despite my trashing of Schiller I believe there indeed buyer and seller psychology at work - I think its the cart and not the horse, however. How much of recent activity is attributed to that is anyone's guess because it's an unmeasurable variable. So even if you are just looking at post 2004 price growth you have to sort out how much is legitimate growth associated with a changing capital markets structure and how much is fluff that will be stripped out as investors attempt to avoid making the same mistakes twice. I don't have any data here to be able to say its 30% or 50% or 90% so given a 25% rise in prices since 2004 we can reasonably expect a drop of X%, plus a little more for downside psychology... I suppose the data is out there for some of this but I am not going to go dig it up... Then what do you do about pre-2004 growth when the CDO market was more conservative. You basically need to do the same excercise. And then what about the part of the bubble that is pre CDO? People though housing was overvalued in 1997 - 10 years later they are still way off - but they may have been righ to some degree... That is so far back in time I have forgotten many of the details of that time.

Once you have done this - then you need to think about how your model impacts specific markets in Marin. One of the fun parts of Marin RE watching is that the market is not monolithic like many other markets in the U.S. Within Mill Valley there are at least 5 distinctly different geographic markets and then there are strata within those markets based on size of home, price of home, size of lot etc.

Sometimes this can create interesting market dynamics that you need to watch out for - and which can create opportunity as well as pitfalls. And because prices are high in Marin those dynamics could be meaningful to a buyer or seller where in another lower price market it would just be noise...

For instance when the CDO market opened up in 2003 the looser standards primarily benefitted those that wanted to stretch into their first home - which drove up low priced (by Marin standards) homes first - the bottom end of the market began to crowd the middle of the market pricewise - $1.5 and up at that point in time - which had yet to shake off the effects of the systemic labor market change that came with the dot com bust... For a while as small amount of extra money bought a lot more house. This created opportunities for owners of the "entry level" homes to move up - capturing that equity growth associated with a boom in entry level buyers - putting that equity to work in a new larger home without necessarily changing how much they were borrowing... Eventually this drove up mid priced homes as well - but there was a lag between the two that could be exploited. High end houses during this time were dead as a doornail.

Today its almost the reverse - mid priced homes were very hot this summer - particularly relative to entry levels - and when the credit crunch came on it was that segment that felt it first... I could be wrong but I think its the only segment where inventory is up in Marin - and particularly in those markets which are the marginal market - meaning the least desirable and last to rise during a run up (often rising the most) and first to fall. High end houses are selling very well after sitting for years - maybe its lower taxes on marginal investment income that is allowing these buyers to buy these houses that are untethered from any rational way to price...

So where are house prices in 5 years? I really don't know. My SWAG is that they are nominally lower than they are today... they might be very volatile between now and then - primarily to the downside - and I think they will more than likely decline in real terms when factoring in opportunity cost. I also think some segments will fair much, much better than others given the growing complexity of the market - and those segments will be defined by location, size and price points.

This is assuming that there are no unforseen events that could increase that volatility even more, e.g,. an earthquake or a spike in inflation, or unemployment or lending rates beyond the current forecast.

So that's not a very good prediction I am afraid... I think that given all the risks in the market the smartest thing buyers can do in Marin if they are worried about values long term is to look for opportunities that they can control and are tangible and not necessarily factored into prices - e.g., buy into the right neighborhoods in the right circumstances.

For instance over the last 7 years Homestead Valley has been steadily transitioning from being similar to Tam Valley in its demographic and value to more like other middle and upper end markets. Identifying that change is much more tangible and easier than trying to guess what is going to happen with global capital markets or buyer and seller psychology. Any appreciation you make associated with that change is yours to keep regardless of what happens to the overall market - because that is a one time, persistent change in that sub-market. Smart buying like that can be a hedge against the non-controllable not predictable nature of the RE market. It won't guarantee that values don't go down - but it would put you in better shape than if you hadn't taken advantage of that opportunity.

Sep 6, 2007, 11:02:00 AM  
Blogger marinite2 said...

before I try to weasel out of making a prediction.

If you don't want to, then don't.

You are not on trial here even if you might feel a little that way as you are staking out a position that diverges (sometimes a little, sometimes a lot) from the positions commonly found on this blog. As much as I appreciate the intelligent and well-written posts you have made, you are not obligated in any way. Personally, I am grateful for an alternative point of view especially from an angle that is typically missing on such blogs. But you are not obligated.

As long as the discourse remains civil and impersonal, it's all good.

Sep 6, 2007, 11:19:00 AM  
Blogger mrlmv said...

Marinite - Therby Fu is.. well its crap left over at the bottom of a post that I failed to delete...

I too am waiting for that big sock run up to capitalize as well - unfortunately for me you have to have both the left and right in order to for them to be of any value - so I am screwed. ;-)

A funny aside while we are on the topic of mismatched footware and human psychology (perhaps the first time in history that sentance has been written) - someone did a study whereby they put a big box of shoes out in mall with a sign that said "free" to see how people would react. The interesting part was that the shoes were all left footed - so they were valueless to anyone that took them. Nevertheless the big box was empty in a few hours... Curious.

All joking aside - those futures do have an impact on your socks. Socks aren't a commodity - they are finished good - so most of the value isn't the commodity cotton or rayon or whatever its the labor that turns that material into a sock. The cost of socks has gone down significantly in real terms over the last century first because of efficiencies associated with manufacturing, transportation and production associated with automation and the emergence of global markets for finished goods (e.g., sock once made in New England shifted to North Carolina shifted to China to follow lower labor costs)... Capital markets enabled this specialization to occur by securitizing the means of that production (the companies that make socks - allowing them to invest in the technologies necessary to make socks cheaper and better)

Without capital markets, its unlikely you could afford to stockpile socks for armeggeddon - they would be too expensive because we couldn't have that specialization in sock manufacture. For instance, if I were to specialize in only making socks in order to reap the efficiency benefits of that specialization in a barter environment I would have a tough time because what if I needed bread but the baker didn't need socks?

Thats why capital markets are good... they aren't infalliable - but just think of the alternative...

Sep 6, 2007, 11:20:00 AM  
Blogger marinite2 said...

Schiller wrote a book in 1996 about how we were experiencing a speculative bubble in the stock market - specifically NASDAQ. He was right - but only off by 4 years. By the time his theory played out - the NASDAQ had risen to over 5000 - even post bubble it stands well above the point where he argued it was in a speculative bubble - today the Nasdaq is 2600 and at no point since he made that prediction has the NASDAQ even come close to 1000.

That's disingenuous. He published the book four years before the bubble popped (I am trusting you on the 1996 publication date as I don't have the book in front of me at the moment to check). The publication date of a book is not an implicit claim on the date of the top of a market. You know this.

I don't recall if Shiller claimed that 1996 (or whenever) was the top but I doubt he did. That would be foolish. If Shiller did spot the speculative mania when the NASDAQ was at 1000 and it then only retreated to 2500 (or some point above 1000, again I am not in a position to check at the moment), so what? You are assuming that when a bubble pops it must return to the level it was at just prior to when the bubble was first identified as such. Maybe in a perfect world that would be correct but I don't think it is realistic. The fact is that a lot of people "lost their shirts" who probably would not have had we not been in the grips of a speculative mania.

Furthermore, spotting the trend and even predicting a future trend is not too difficult but predicting the points at the peak and bottom is incredibly difficult and a "fool's game". You could have ridden that bubble up knowing it would reverse strongly at some point until you felt we were uncomfortably close to the reversal point and then pulled out a little early and you would have been well ahead of the game. I personally know people who refused to believe that NASDAQ was in a speculative bubble (who literally spounted "it's different this time", "it's the new economy", etc. [which, by the way, IMO was partially correct and why NASDAQ did't retreat all the way back to 1000 or so]) and who rode it out and got effectively wiped out as a result...lost 2/3+ of their portfolio value. I am not exagerating. I personally know people who got out a little before the bust because they sensed the reversal point was imminent (yet months too early), preserved all of their gains up to that point, and bought back in a little before the bottom and as a result are far better off.

Sep 6, 2007, 11:39:00 AM  
Blogger marinite2 said...

Marinite - Therby Fu is.. well its crap left over at the bottom of a post that I failed to delete...

Ok, I was afraid "fu" was derogatory shorthand for something that would get you deleted. No harm done.

Sep 6, 2007, 11:41:00 AM  
Blogger mrlmv said...

SF Jack - In Japan, where real estate was impacted by "institutional changes" and the "wealth growth factor" on the way up to 1989...

Japan is an interesting case - but I don't think its completely applicable here. First off there wasn't any real persistent change in lending practices in Japan - the lenders merely got caught up in speculation as well. The equivilent here would have been if for some reason your local S&L after 50 years of sucessfull home lending based on conservative terms - terms that worked given the risks it faced as in institution doing both origination and investing in a geographically limited with a portfolio too small to have any statistical certainty - decided to throw caution to the wind and start offering 0% down loans... there is no structural change there. Just stupidity... and stupidity is not a persistent structural change its temporal.

Japan's problems were further exacerbated by moronic central bank management of the problem - which resulted in real deflation for almost 10 years.

This BTW is the real risk I see in our current crisis - if the fed, treasury and politicians do a poor job of managing the liquidity crisis - the current situation could touch off a similar chain reaction. Luckily there are some that run this country that still have ties to the great depression - and as such are very cautious about the implications of markets run amok.

Japan is a good example of why I think you have to make distinctions in the current CDO crisis - part of what was going on was stupid - its not a persistent change and it will come out of prices when identified - but some of it is persistent - for no other reason than there is no realistic way to go back to a pre-CDO market structure. What the persistent part looks like is up in the air at this point in time...

Sep 6, 2007, 11:44:00 AM  
Blogger mrlmv said...

Marinite -

Well, in retrospect, perhaps I engaged in a bit of sloppy fact checking (I hate that - see you can't believe everything you read on the internet - hell we should abolish it!)... The book was published in 2000 not 1996.

In 1996, by his own admission, he testified to the fed and congress that markets were "irrational." This is days before Greenspan's "irrational exuberance" speech.

While technically not calling a top - I don't see how Schiller can have any credibiilty claiming markets are irrational at a point in time yet be allowed to separate himself from the value of the market at the time that statement is made. It would be like me prediting that the 49's are "winners" and will win 10 games but not define over how many years those 10 winning games are...

By definition "irrational" at least in the context of 1996 meant overvalued - which by implication means that rational has to be less than 1000. I suppose I don't know if "irrational" and speculative bubble are the same thing in Schiller's mind - but again the context of this comment is about value of the market so how is there an irrational valuation on the market that isn't a speculative bubble?

You are right that this isn't the same as calling a top - but what it does say is that according to Schiller at some point in order to become rational the market has to turn around and retreat to less than 1000 - and given the severity of the concept of "irrational" v. less strident terms like "overvalued" signifcantly less than 1000.

I guess he could predict that the market would continue to act in an irrational manner and the prices would continue to climb as a result - but how is that anything but a guess?

If its not a guess, as you lay down some reasons for why the market will continue to grow irrationally the market is no longer irrational - its rational at some level. It may be risky, it may be someplace he doesn't want to invest because he is a value investor - but if there is a logical reason as to why the market will continue to grow in the face of being "irrational" by his definition that growth has to be rational growth or there is no rational reason for him to say it will continue to grow...

I guess I don't buy your "calling the top" argument because if you sat in that room and listened to Schiller and then ignored his testimony - in Schiller's eyes you would be acting irrationally - how is that not the same as calling a top?

As for bubbles bursting down to prior levels - I don't disagree - but to be fair - if 1000 is irrational and therefore something significantly less than 1000 is rational - even if you account for growth associated with inflation - when the bubble popped according to Schiller it would need to retreat below 1000... I suppose you could argue that the bubble could pop but prices would stay irrational - but why bother...

Sep 6, 2007, 12:41:00 PM  
Blogger realtornow! said...


Regarding Shiller:

1) He published Irrational Exuberance in 2000, as you now acknowledge, and . . . well, he nailed it. The NASDAQ still has not recovered, the SP500 just reached it’s 2000 levels and we experience a very nasty bear market form 2000 to 2003. He nailed it.
2) The second edition of Irrational Exuberance is published in 2005, and the big addition to this version is extensive treatment of housing. He nailed it again. Summer 2005 marks the height of the housing bubble, at least as measure by home price appreciation and home builder stocks.

Bagging on Shiller’s timing? Ridiculous. Laughable. Pathetic

Sep 6, 2007, 7:14:00 PM  
Blogger marinite2 said...

Bagging on Shiller’s timing? Ridiculous. Laughable. Pathetic

I have to admit I agree.

Sep 6, 2007, 7:31:00 PM  
Blogger Matthew said...


Well, I consider transportation as a necessity of life given man no longer lives in caves and hunts Woolly Mammoths on foot.. we do need wheels to get our morning lattes after all...

I agree w/you regarding the Fed rate and how that rate impacts mortgages rates.. however, given the Fed rate gets soooo much ink nowadays, the average home buyer probably knows the Fed is in a loosening or tightening bias and surmises that their actions will have a direct impact on their mortgage terms... of course, the RE machine knows this and prays off of it and did a great job scaring the crap out of potential buyers during the last tightening phase... they got what they deserved... pink slips for many of them...

Although I believe loose / illegal lending was a major driver in all of this, I still consider the general market psychology (mania as you say), created by the RE machine and the average American's desire to hit the grand slam, was the #1 driver in this bubble.. loose lending provided the fuel and oxygen once the mania was well underway... who, after all, really doesn't care about the Jones??... not many, especially in Marin, where money and status is very important.. so, comparing housing prices today to historic prices has merit I believe, even with the relative shortage of land for development in Southern Marin.. Marin is Marin after all, so even if someone has to slum it in Novato or San Rafael, they still are “owners living in Marin”..

I recognize your point however and do believe their some fundamental explanation for the huge price increase.. I’d give the institutional change NMT 10-15%… I don’t buy, after all, that this fundamental or institutional change was just realized within the market right along with the hype and bubble (which is 85-90% of the price increase)… that’s far too coincidental for me to swallow..


Sep 6, 2007, 10:40:00 PM  
Blogger Matthew said...

I was going to add love and friendship to my short list of life's necessities to survive, but my ex-wife proved, unequivocally, that one can survive w/out them..

Sep 6, 2007, 10:53:00 PM  
Blogger mountainwatcher said...

Marinite....Thanks for keeping this blog alive!

mrlmv... Thanks for the thoughtful reply.

After reading all of this, I realize that I have no clue about the reality of this situation.
I can very easily understand why millions of people have been swayed by "experts".

How is a normal working person going to sort this all out?
From 2000 to 2004, the media was saying,"buy now or be forever priced out"
Were they right?
Prices went crazy.
What caused this?

Are these new prices the real deal?
Will it ever go back to fair prices?

There are very eloquent arguments on both sides.

We are sheep and the shepherds are often wolves.

Sep 7, 2007, 1:22:00 AM  
Blogger realtornow! said...

"There are very eloquent arguments on both sides."

Take it the next step. Go back and look at the arguments made over the last couple of yours about this housing boom. Who predicted how this would go?

Choose to be a sheep if you will.

For me, I'd rather use my brain rather than throw up my hands and say, "Oh my, both sides have such good points."

Sep 7, 2007, 12:06:00 PM  
Blogger mrlmv said...

Mountainwatcher - I gotta agree with Realtornow! on doing the hard work. I have dealt with the media professionally and quite frankly good journalists are few and far between - often their mind is made up before they gather facts...

That's a function of the reality in which they play - which is to say that long, dry analytical pieces tend not to be appreciated by anyone... I love the Economist in theory - in practice its a whole nother story...

This is why they were so gung ho on the way up and now so negative... Easy sensational pieces with "expert" commentary which itself is suspect doesn't really let you make good judgements.

Luckily the internet has lots and lots of places to gather information and data to form your own opinions...

Like I said before people need to make homeownership a lifestyle choice first... if you are planning to be moving every couple years or see home equity as a way to bootstrap yourself into the house you really want - you need to step carefully. If you are planning to stay in a place forever and you can afford your loan - then its a bit easier because price will matter so much less (except I suppose to your heirs)...

Sep 7, 2007, 2:39:00 PM  
Blogger mrlmv said...

Bagging on Shiller’s timing? Ridiculous. Laughable. Pathetic

I have to admit I agree.

Whoa guys... I corrected myself in a subsequent post - perhaps you didn't see.

Schiller first publicly called the market "irrational" in 1996 when he testifed to the Fed bank presidents - not when he published the book in 2000. That time, is confirmed, BTW, by him...

So I take great umbridge and furious anger (to mis-paraphrase Samuel L. Jackson) with your brazen and unwarranted ridicule........ ;-)

Hey look, you can complain about me pointing it out, but it was him, not me, that said he called the market irrational in 1996 in a meeting with the fed board..

Sep 7, 2007, 2:58:00 PM  
Blogger marine_explorer said...

"I can very easily understand why millions of people have been swayed by 'experts'"

Yes, especially on the heels of one speculative meltdown, they were willfully duped to flirt with insolvency all over again. Those involved should simply admit their judgment was compromised by fear and blind greed. Stop blaming the MSM for your own lack of judgment. This fiasco should have been completely obvious by 2005 to any intelligent adult--as simple as that.

Sep 7, 2007, 5:40:00 PM  

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