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January 08, 2009



I remember watching housing prices climb and climb and climb, and I said, "at some point these prices have to come down, because the utility of homes has not increased nor has supply become constricted." Yet prices did keep escalating, long after I would have expected them to reverse. I began to wonder if there was some one-time adjustment going on, and I was missing out of buying at the old price. Both the institution of mortgage interest write-off and, in California, of Prop 13 property tax limits caused (effectively) permanent, one-time adjustments in purchase price levels because they lowered the cost of ownership relative to other housing choices. Was I missing out? So far as I could tell at first, no, all I was missing out on was relatively low interest rates, but those come and go. Then I started learning about mortgage securitization and the new lending practices. This was, if it was really sustainable, a good reason for a one-time shift, independent of the bubble. Thus, even granting an inevitable correction, there was no guarantee the post-correction house prices would be much lower than they were at the time I was first introduced to securitization. This might indeed have convinced me I was missing out, had not it already been obvious by then (2006) that the whole practice was wobbly and shot through with institutionalized flaws in execution. I wasn't (and still am not) sure that there weren't buried efficiencies that would indeed cause a shift, but I could tell that most of the price shift was a credit-mediated bubble, with little or no durable real price increases. Of course, neither was it clear to me exactly how bad things really were, and how endangered the credit markets were going to be. I mean, just looking at prices in graph form made things look terrible, but I assumed things weren't as bad as they looked because if they really were that bad, the volume levels of the warnings would be higher.

All of which is a narrative from a guy with some training in economics as well as a friend in the mortgage banking industry. Obscure the details and I brought pretty typical heuristics to the table and only reached different conclusions because of fortuitous timing (I wasn't remotely in the real-estate market so I didn't pay much attention until the underbelly was already showing). I figured at first that prices would come down, and then when they didn't, I started to wonder what I was missing, then I heard a (not obviously facile) explanation as to why the prices might not be coming down and thought it plausible, then assumed that if things were really bad the "experts" would be making more noise. All reasonable, I think, yet nothing to prevent bubbles. So yeah, it does seem like bubbles will always be with us.

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