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Why prices will continue to fall: Part 4


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2011 Feb 22, 1:02pm   6,071 views  11 comments

by Hysteresis   ➕follow (0)   💰tip   ignore  

  • Peak: Price-to-Income of the last bubble: 1989
  • Bottom: Price-to-Income of the last bubble: 1997
  • Duration: 8 years.
  • Peak: Price-to-Income of the this bubble: 2006
  • Bottom: Price-to-Income of the this bubble: ?
  • Duration: 5 years and counting.
  1. i doubt this huge bubble will deflate faster(5 years so far) than the previous much smaller bubble (8 years for price/income to bottom).
  2. i also believe the government intervention in 2009 extended the bursting of the bubble by roughly a year (see the two bear-market-rally peaks in 2009/2010) so instead of 5 years of price/income decline, we're probably at year 4.
  3. the current price/income is -above- the peak price/income of the previous bubble which is bearish.

From calculated risk

comparing the price-to-income chart to the price chart from 1989-1997, the prices were relatively flat, which implies rising incomes were responsible for the lower price/income ratio.

just to reiterate, while income was rising, prices were flat. the bulls argue as income increase, prices will surely follow, but this is not always the case.

part 1
part 2
part 3

Comments 1 - 11 of 11        Search these comments

1   bubblesitter   2011 Feb 22, 1:14pm  

I think the end of that line is below March 2009(first chart). Isn't it?

2   Hysteresis   2011 Feb 22, 1:20pm  

yes. income was estimated for 2010.

3   bubblesitter   2011 Feb 22, 1:26pm  

Syphilis says

yes. income was estimated for 2010.

LOL. I look forward to the 2009 bottom callers comments.

4   Â¥   2011 Feb 22, 1:40pm  

bubblesitter says

I think the end of that line is below March 2009(first chart). Isn’t it?

The first chart is kinda useless since interest rates are the third variable we need to analyze.

Here's a chart showing that rates fell 20% in 2009 and touched -30% in 2010, compared to the 2006-2008 period.

It is possible now in Japan to get 1% mortgage interest rates for the first 10 years, then 2-2.4% for years 11-35. We get that here and "Price to Median Household Income" will shoot up like a rocket.

5   justme   2011 Feb 22, 1:42pm  

Does anyone have the facts about how much government intervention there was after 1989?

I mean, we know that Greedspan lowered the interest rates for an extended period, but what else was going on?

6   bubblesitter   2011 Feb 22, 2:06pm  

But interest rate is not the only player. Unemployment rate has the highest impact on home prices IMO.

7   toothfairy   2011 Feb 22, 2:09pm  

bubblesitter says

Syphilis says

yes. income was estimated for 2010.

LOL. I look forward to the 2009 bottom callers comments.

Well for one you might want to use the last chart instead since those are the actual prices.

8   toothfairy   2011 Feb 22, 2:21pm  

i also believe the government intervention in 2009 extended the bursting of the bubble by roughly a year (see the two bear-market-rally peaks in 2009/2010) so instead of 5 years of price/income decline, we’re probably at year 4.

That's where you're wrong. Government intervention didn't prolong the recovery. It more like masked the crash that would have happened otherwise.

Believe it or not that's why a lot of people were bitter about not letting the free market "take it's course".
Mostly the same as the "no we dont want healthcare" tough love crowd.

9   TMAC54   2011 Jun 19, 4:13am  

GUBMINT had two choices. Their job is to protect people from people.

#1. DO nothing, Allow the correction to snowball. Resulting in depression, and rioting. (Would illegal aliens then return to their home country ?)

#2. Spend tax money to soften the impact . These Firemen have placed a trampoline for the demographics who are jumping off the burning building.
Will they save the building ? Sorry, the building was plastic !

They slowed the pendulum from swinging .

Imagine, soon we will again be offering LESS than the asking price !

10   thomas.wong1986   2011 Jun 19, 4:31am  

justme says

Does anyone have the facts about how much government intervention there was after 1989?

zip, zero, nada... the boom was income driven. The turn down was due to many local/national/international factors.

11   PRIME   2011 Jun 19, 8:53am  

point 3 is interesting. i did not realize the price to income ratio was still higher than the late 80s.

i don't think you should call the late 80s a bubble on a national basis. there were local bubbles in the late 80s, but it was not national. I am pretty sure Shiller said that the bubble that began in 1997 was the first national bubble in Irrational Exuberance.

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