Another concern, as indicated by the graphic in the article, is the high density of ownership by a single investor (in this case - Blackstone)
Showing posts with label house prices. Show all posts
Showing posts with label house prices. Show all posts
Tuesday, February 11, 2014
Rental Home Securitization
Rental homes are the latest in the long list of financial assets that are been securitized. On one hand, having capital moving into the real estate market should help to reduce the backlog of foreclosed homes. But on the other hand it is hard to ignore our past experience of securitization. The spectre of house prices being bid up to a point that creates another bubble looms large.
Another concern, as indicated by the graphic in the article, is the high density of ownership by a single investor (in this case - Blackstone)
It seems as though Blackstone is trying to control the market in rental properties in some locales. There really can only be one reason for this - and that is to have sufficient market power to control the rental level in an urban region.
Another concern, as indicated by the graphic in the article, is the high density of ownership by a single investor (in this case - Blackstone)
Thursday, August 25, 2011
NOVA: "Mind over Money"
I caught a re-run of the PBS NOVA documentary "Mind over Money" last night. The documentary explores the role of behavioral finance in market bubbles and collapses. For those wondering: Behavioral finance is the study of how human psychology affects financial decision making. It is generally at odds with a lot of the predictions of the Efficient Market Hypothesis which states that prices reflect all available information and markets as a whole are rational. Whether markets are efficient or not is of great importance to investors and policy makers.
Back to the video - this is a MUST SEE for any student of finance. My current MBA students take note!
Here is the preview.
The video is well done and features interviews with those who are proponents of behavioral finance - notably Richard Thaler and Robert Shiller, and those that oppose it - Eugene Fama, John Cochrane and Gary Becker.
The experimental evidence for behavioral finance is very strong, but the link between what people do in a lab environment and what markets do as a whole is much weaker. Consider, for example, the housing bubble: Behavioral proponents will claim that a housing bubble occurred because of various irrational behaviors. For example people pay too much attention to recent events and see how prices rising and then extrapolate these increases. In addition, people observe how others are making money in housing, and they feel remorse if they don't buy also. Finally when prices do go up, people feel that their original decision to buy is being confirmed and that they were correct. This creates a self feeding cycle until finally the bubble bursts.
But an efficient market proponent would offer a different story - low interest rates, easy credit and limited downside for buying a house you can't afford creates an incentive to buy. In effect people who buy houses with close to 100% financing on teaser rates are really just buying a call option on the value of the house. If it goes up then they make money, but if it falls they just walk away. The rational thing to do for many people is to take the gamble.
Regardless of where you fall in the efficient markets vs behavioral finance debate, the insights of behavioral finance at the individual level are really important and can protect people from their own irrationality.
Back to the video - this is a MUST SEE for any student of finance. My current MBA students take note!
Here is the preview.
Watch the full episode. See more NOVA.
The video is well done and features interviews with those who are proponents of behavioral finance - notably Richard Thaler and Robert Shiller, and those that oppose it - Eugene Fama, John Cochrane and Gary Becker.
The experimental evidence for behavioral finance is very strong, but the link between what people do in a lab environment and what markets do as a whole is much weaker. Consider, for example, the housing bubble: Behavioral proponents will claim that a housing bubble occurred because of various irrational behaviors. For example people pay too much attention to recent events and see how prices rising and then extrapolate these increases. In addition, people observe how others are making money in housing, and they feel remorse if they don't buy also. Finally when prices do go up, people feel that their original decision to buy is being confirmed and that they were correct. This creates a self feeding cycle until finally the bubble bursts.
But an efficient market proponent would offer a different story - low interest rates, easy credit and limited downside for buying a house you can't afford creates an incentive to buy. In effect people who buy houses with close to 100% financing on teaser rates are really just buying a call option on the value of the house. If it goes up then they make money, but if it falls they just walk away. The rational thing to do for many people is to take the gamble.
Regardless of where you fall in the efficient markets vs behavioral finance debate, the insights of behavioral finance at the individual level are really important and can protect people from their own irrationality.
Tuesday, March 1, 2011
Another example of very poor finance reporting...
Reposted on yahoo Saturday - an article about how house prices have fallen in some markets. Can you spot the glaring, massive, unbelievably stupid math errors?
HT: Ron Elmer
In case they correct the article, I'll copy part here..
HT: Ron Elmer
In case they correct the article, I'll copy part here..
Portland, Ore.Average home sale price in 2010: $270,418
Average home sale appreciation between 2009 and 2010: -91.5 percenTallahassee, Fla.Average home sale price in 2010: $220,135
Average home sale appreciation between 2009 and 2010: -91.48 percentTucson, Ariz.Average home sale price in 2010: $147,731
Average home sale appreciation between 2009 and 2010: -88.06Wake Forest, N.C.Average home sale price in 2010: $240,801
Average home sale appreciation between 2009 and 2010: -87.53 percentCathedral City, Calif.Average home sale price in 2010: $182,076
Average home sale appreciation between 2009 and 2010: -85.16 percentWahiawa, HawaiiAverage home sale price in 2010: $331,498
Average home sale appreciation between 2009 and 2010: -82.13 percentWeatherford, TexasAverage home sale price in 2010: $131,586
Average home sale appreciation between 2009 and 2010: -77.83 percentDover, Del.Average home sale price in 2010: $168,805
Average home sale appreciation between 2009 and 2010: -66.26 percentSycamore, Ill.Average home sale price in 2010: $168,053
Average home sale appreciation between 2009 and 2010: -48.49 percentSt. Charles, Md.Average home sale price in 2010: $245,191
Average home sale appreciation between 2009 and 2010: -45.66 percent
What exactly is the function of the financial sector?
An interesting article by Professor Bill Black on the fundamental flaws of the financial sector. Prof Black makes the argument that the sector is too large and it basically sucks the life out of the real economy.
His arguments are pretty strident, and in most cases rather unsubstantiated, but still thought provoking. It reminded me of a discussion that I had with a forestry Professor who lives down the street from me. He asked me what I thought should be the correct size of the financial sector. I couldn't give him a specific number, but I did note that we may have an oversized financial sector due to some government policies.
The two policies that come to mind are the mortgage interest tax deduction and the implicit guarantee of too big to fail banks. The interest tax deduction subsidizes home ownership and boosts the mortgage backed securities market, while the too big to fail guarantee causes banks and other financial institutions to get too large and, in effect shift some of their risk to the federal government.
Abolishing the interest tax deduction and imposing size related capital requirements on banks would go a long way to remove these distortions.
His arguments are pretty strident, and in most cases rather unsubstantiated, but still thought provoking. It reminded me of a discussion that I had with a forestry Professor who lives down the street from me. He asked me what I thought should be the correct size of the financial sector. I couldn't give him a specific number, but I did note that we may have an oversized financial sector due to some government policies.
The two policies that come to mind are the mortgage interest tax deduction and the implicit guarantee of too big to fail banks. The interest tax deduction subsidizes home ownership and boosts the mortgage backed securities market, while the too big to fail guarantee causes banks and other financial institutions to get too large and, in effect shift some of their risk to the federal government.
Abolishing the interest tax deduction and imposing size related capital requirements on banks would go a long way to remove these distortions.
Monday, January 25, 2010
So how is the first time home buyer's credit working out?
Not that good. As soon as it expired, sales plunged, just as most predicted, all the credit served to do was borrow demand from the future.
Monday, November 2, 2009
Home buyer's credits
Jack Hough of Smartmoney doesn't like the proposed extension of the home buyers credit. Neither do I. I am not sure that I fully agree with all his points, but the first two are on target. A home buyer credit will have the effect of raising prices. I doubt very much that it will have significant stimulus effect.
May I suggest a better use for the money. If you want to stimulate the economy and increase employment, use the credit instead to reduce payroll taxes. You'll distribute the stimulus money evenly across the economy instead of just to a) new home buyers or b) people who want to trade their clunker for a prius.
May I suggest a better use for the money. If you want to stimulate the economy and increase employment, use the credit instead to reduce payroll taxes. You'll distribute the stimulus money evenly across the economy instead of just to a) new home buyers or b) people who want to trade their clunker for a prius.
Thursday, July 9, 2009
How to deal with foreclosures
The Economist reports on a recent Fed study that tries to explain why so few mortgages that are in default are renegotiated. Turns out, it is not really because of securitization. Instead, banks tend to be reluctant to renegotiate because a) many renegotiated loans end up defaulting anyway and b) some loans that are in default "cure themselves" - in other words - come out of default. So more often than not, not doing anything is the best strategy.
Friday, February 27, 2009
Are house prices too high - still?
This graphic would suggest so. Based on the Case Shiller house price index. Source: Business insider
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