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Bernanke Says Housing Market Faces Significant Obstacles


By Patrick   Follow   Tue, 20 Nov 2012, 1:49pm PST   746 views   9 comments
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http://www.businessinsider.com/bernanke-housing-market-speech-atlanta-2012-11

Bernanke said the Fed will do what it can to back the housing recovery and reiterated that the Fed would use its policy tools to aid the economy. The Fed chairman also said that the U.S. housing revival faces significant challenges, and that weak housing is a powerful headwind to the recovery. Furthermore, Bernanke said that tight lenders may be thwarting creditworthy borrowers.

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Truth Bunny   Tue, 20 Nov 2012, 7:29pm PST   Share   Quote   Permalink   Like (2)   Dislike     Comment 1

Can someone tell me why we WANT prices of ANYTHING to go UP, especially the biggest purchase of our lives? Do you want to pay More or Less for a car? Do you want to pay More or Less for a T.V.? Do you want to pay More or Less for a HOUSE? I just don't understand how we have all been tricked into thinking that housing is considered in a Crisis mode when prices are CHEAPER for us, instead of more expensive for us.
Or am I just a moron?

marco   Tue, 20 Nov 2012, 7:37pm PST   Share   Quote   Permalink   Like (3)   Dislike     Comment 2

Who in their right mind would even listen to this financial circus clown?

Jeremy Grantham just said that our recent bubble was the largest in 1,200 years . Investors should be wary of a Fed [who] is led by a guy [Bernanke] who couldn’t see a 1-in-1200-year housing bubble!

pkennedy   Wed, 21 Nov 2012, 1:28am PST   Share   Quote   Permalink   Like   Dislike     Comment 3

Truth Bunny says

Can someone tell me why we WANT prices of ANYTHING to go UP, especially the biggest purchase of our lives? Do you want to pay More or Less for a car? Do you want to pay More or Less for a T.V.? Do you want to pay More or Less for a HOUSE? I just don't understand how we have all been tricked into thinking that housing is considered in a Crisis mode when prices are CHEAPER for us, instead of more expensive for us.

Housing follows a cyclical pattern AND a pattern in which people invest the maximum they can afford to get the best house they can afford. This trend has been traced back over 300 years by case shiller. If you could live in your dream house on your current salary, then everyone else would want to to. That means everyone above you in pay will pay MORE for it, up until you can't afford it. Then it's them and the next higher paid guy, who will pay MORE for it until he gets it. It's supply and demand at it's simplest form. Housing takes the maximum money from a person it can. If we somehow brought prices down, then the "poor" people, will jump in and try and grab those dream houses that they could in theory buy now, which isn't how supply and demand works.

Housing should follow inflation essentially, and it didn't between 2002-2007 and then it dropped massively (especially considering the interest rates). Now investors like myself are seeing MASSES of great buys. We're gobbling up everything we can see. And the average worker is going to pay for it because he has no choice right now. He can't borrow money, it's too difficult. Meanwhile, investors are gobbling things up because we can get money together to pick these places up for dirt cheap. Eventually, we'll sell them back, but at a huge premium, when things go back to 2002-2007 numbers.

Pricing is setting itself up for a sling shot right now. Demand is going up, but no one can buy. When they can buy, it will be a feeding frenzy and 2002-2007 again.

Patrick   Wed, 21 Nov 2012, 1:49am PST   Share   Quote   Permalink   Like (1)   Dislike     Comment 4

pkennedy says

That means everyone above you in pay will pay MORE for it, up until you can't afford it. Then it's them and the next higher paid guy, who will pay MORE for it until he gets it. It's supply and demand at it's simplest form.

Yes, prices get bid up until you cannot afford the house you want (unless you have modest tastes).

But the bubble was not a simple form of supply and demand. It was complicated by recursion in lending calculations. Most people will borrow as much as they possibly can to buy a house, no matter whether they can really afford it, and no matter how bad the deal is compared to renting. That's just how people are, and realtors ruthlessly take advantage of that. The first question realtors ask is "how much could you possibly borrow, if, say, you wanted to commit financial suicide to maximize my commission?" (Maybe they're not quite that honest about it, but that's basically what they ask.)

So the limiting factor on prices is lending, not buyers, who you can safely assume are infinitely stupid. But the amount the bank will lend depends on what current houses are selling for, and what current houses are selling for depends on the amount the bank will lend.

See the problem? During the bubble, the banks made ever-worse loans because sales prices seemed to show houses were worth more and more, and those ever-worse loans drove prices higher, and around and around it went until people started defaulting and a vast amount of that equity simply disappeared. It was never even there in the first place.

The solution is to base all lending on rents, which do not depend on lending. This would break the cycle of recursive stupidity.

Truth Bunny   Wed, 21 Nov 2012, 3:24pm PST   Share   Quote   Permalink   Like   Dislike     Comment 5

Kennedy,
If prices should follow inflation, then why do you expect a slingshot?
Or, was the last decade a once in a 300 year event due to ease of money lending, and we should not expect anything more than inflationary appreciation from here on out?
Anyone have any thoughts?

pkennedy   Wed, 21 Nov 2012, 3:36pm PST   Share   Quote   Permalink   Like   Dislike     Comment 6

It doesn't matter how much the banks lend, as long as the consumer can pay the monthly payments. If a house can be rented for less than it's value, then it's not a smart investment, it's a renter taking advantage of a stupid landlord, or the renter can win and the landlord can win with the rents they're charging, but it still means they can make the numbers work at the current value of the house.

I expect a slingshot because the current values are far below rental values and when people start realizing that the market is actually turning around, they'll try and jump in and realize that they can't because investors are out bidding them and prices will creep up until investors say "it's yours!". Right now housing is priced at investor levels, which is usually about 20% below full market value. So housing will have to jump at least 20% up, before investors back off and start becoming more choosy, looking for the diamond in the rough in terms of returns.

mell   Wed, 21 Nov 2012, 3:39pm PST   Share   Quote   Permalink   Like   Dislike     Comment 7

Also, this theory about house prices following inflation and people trying to outbid others with all of their salary does not seem to translate to other countries even if it were true for the US. I mean, you can take almost any country in Europe, let's say Germany, and house prices have been extremely stable, actually well below inflation which is also lower than in the US. Also, I don't get the feeling that people try to frantically outbid each other across the big pond, even though they should since they are more densely populated than the US. But we shall see soon during the next few years who made the right predictions and I am certainly no housing expert. I feel more comfortable in the stock market and there I have to say it will be very choppy with a negative outlook unless QE4 disguised as a debt tackling compromise is announced. Earnings have been bleak lately (esp. tech and retail) and so have jobs numbers.

Truth Bunny   Wed, 21 Nov 2012, 3:40pm PST   Share   Quote   Permalink   Like   Dislike     Comment 8

Oh I see; a slingshot due to easier access to credit. That has been proven to be the case.
So if this is the case, your recommended strategy would be to buy now and sell in about 6 years, when the inevitable next crash should occur? History repeating itself kind of thing. Could work. But one must almost be dead on balls accurate with timing, our they could be caught holding the bag. Again.

Truth Bunny   Wed, 21 Nov 2012, 3:43pm PST   Share   Quote   Permalink   Like   Dislike     Comment 9

Can't disagree.
Where can I make 10% like the old days !

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