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Source link: http://archive.mises.org/15688/its-not-just-the-sand-states-anymore/

It’s Not Just the Sand States Anymore

February 14, 2011 by

Writing from Seattle, New York Times writer David Streitfeld, paints a bleak picture of the housing markets in cities thought to be crash-proof. “In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.”

Seattle has everything going for it and yet home prices have fallen 31 percent from the peak. Local economists there believed the idea of falling home prices was nonsense. “The fact that even a fairly prosperous area like Seattle was ensnared in the downturn shows just how much of a national phenomenon the crash has been,” writes Streitfeld.

Alan Greenspan didn’t believe a housing crash was possible on a nation-wide basis, saying in 2002,

The ongoing strength in the housing market has raised concerns
about the possible emergence of a bubble in home prices. However,
the analogy often made to the building and bursting of a
stock price bubble is imperfect. First, unlike in the stock market,
sales in the real estate market incur substantial transactions
costs and, when most homes are sold, the seller must physically
move out. Doing so often entails significant financial and
emotional costs and is an obvious impediment to stimulating
a bubble through speculative trading in homes. Thus, while
stock market turnover is more than 100 percent annually, the
turnover of home ownership is less than 10 percent annually—
scarcely tinder for speculative conflagration. Second, arbitrage
opportunities are much more limited in housing markets than
in securities markets. A home in Portland, Oregon is not a close
substitute for a home in Portland, Maine, and the “national”
housing market is better understood as a collection of small,
local housing markets. Even if a bubble were to develop in a
local market, it would not necessarily have implications for the
nation as a whole.

The FDIC published a report in 2004 stating,

[I]t is unlikely that home prices are poised to plunge nationwide,
even when mortgage rates rise. Housing markets by nature are
local, and significant price declines historically have been observed
only in markets experiencing serious economic distress.

And when Ben Bernanke was questioned in 2005 about a home price bubble, he answered,

Well, I guess I don’t buy your premise. It’s a pretty unlikely
possibility. We’ve never had a decline in house prices on a nationwide
basis. So what I think is more likely is that house prices
will slow, maybe stabilize: might slow consumption spending a
bit. I don’t think it’s going to drive the economy too far from
its full employment path, though.


Kel Kelly February 14, 2011 at 6:24 pm

Anyone who has traded ultra-low volume options knows that prices can change without a single transaction having taken place. In the case of houses, if the amount of money people have to spend on houses falls by half, the bid price for current house prices will fall by half.

RTB February 14, 2011 at 10:33 pm

“I don’t think it’s going to drive the economy too far from
its full employment path, though.”

Since when have we been on a full employment path? Maybe he’s fully employed, but what about the rest of us?

Anthony February 14, 2011 at 11:36 pm

The truly incredible thing is that people still trust Bernanke to “run the economy”… you would think that anyone so obviously and completely wrong on such an important issue would at the very least lose his credibility. Not when he works for the government, I guess.

Greg Ransom February 14, 2011 at 11:37 pm

In 2003, Greenspan was in the audience while BIS chief economists William White explained why there was a massive malinvestment bubble building, and why it would eventually bust.

Reporters at the event say Greenspan never looked up — never looked White in the eye.

That, to me, speaks to Greenspan’s character.

Doughtyman February 15, 2011 at 12:07 am

There cannot be so many stupid people in positions of authority. There must be a destructive agenda.

HL February 15, 2011 at 12:22 am

I spent two hours today with an investor who was adamant that his little strip mall property would recover. It’s 80% vacant and about 10 million under water on current valuations. But, you see, in the long run real estate only goes up. Just look at Detroit!

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