Gov't essentially admitted to manipulating and propping up real estate prices

In general, housing obeys the laws of supply and demand: higher demand leads to higher prices. Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices. The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS. Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income.

Of course; I believe they have been freely admitting this policy since the start. You have to realize that the money backing mortgages came in two varieties: bank deposits and money market funds that gave short-term financing rolled weekly / monthly. The former is FDIC-insured, meaning if the market drops and more people walk away rather than pay their losses over a decade, the taxpayer will plug the hole. The latter is all sitting in T-bills for safety, and the govt had to start taking assets at their discount window to keep the money market funds "alive" in terms of being available for financing. Without this, the scale of deleveraging would be far worse. Regardless, the taxpayer is on the hook for this money as well. Finally, the taxpayer is on the hook for Freddie/Fannie directly.

The propping of the housing market, like it or not, is for the benefit of the taxpayer. Rather than forcing the taxpayer to take the loss, it is put on the shoulders of the homeowner to pay out over a decade. If the homeowner sells an inflated price to some other lemming, said lemming will pay out over the decade. The point is to keep the loss out of the hands of the taxpayer as much as possible.

I believe we had a situation where foreign governments and other sensitive buyers were big holders of debt in financial institutions impacted by mortgage debt. Propping up the mortgage market serves this purpose too. Paulson wrote about Russia advocating selling of Fannie debt.

well like I said, its possible we just carry trade our way out of this mess. It goes like this:

100 mark, 30 bid
90 mark, 40 bid
80 mark, 50 bid
70 mark, 60 bid

all of a sudden your in the clear...Maybe we are at 80 mark, 50 bid now. who knows...prime and alt-a are the concerns now, not so much option-arms even though that is getting the press with loss severity over subprime now. Im hearing prime is the big elephant in the room and whole loan marks, but who cares, if banks dont have to mark them properly to market and can keep them hidden in sivs off balance sheet, why mark them to where trades are? just continue to carry trade the way up until the spread doesn't matter anymore

Well if the gov't just wants to propr up prices, they should just pass a "right of first refusal law" that says the gov't can buy any property where the transaction is too low. Would be a lot more honest.

The Easy Street's who are predicting 40% market crash from here, are basically doing an updated version of "Fight the Fed", which any trader will tell you is a big mistake.

theyre on balance sheet...just not marked properly

No one can predict the future with any certainty, but I think those planning their lives around a 40% further drop in the next year or two may be just as disappointed as those planning around expectations of a 40% increase over the next decade. For a variety of factors, I think we're looking at a 0-20% drop in nominal prices combined with a decade of stagnation to let inflation take care of another 20-30%.

What you are misunderstanding is that transactions are still in many places (e.g., NYC) happenning at "too high" prices that the taxpayer would not want any part of. If prices crash, taxpayer is on the hook. If taxpayer buys at still-high prices, taxpayer is on the hook. However, if homeowner remains in home waiting (possibly hopelessly) for prices to come back so their zero-ish equity can go up while paying negative effective carry each month, taxpayer is off the hook. If taxpayer can convince lemming to take the place of negative-carry homeowner, taxpayer is off the hook.

There's a difference between propping up prices so you take the loss (what is being done) and propping up prices so taxpayer takes the loss (what you suggest).

Just one man's opinion...

Some if not all of the Gov't policies support prices in NYC as well.

what percentage would we be talking to get back to 1998 or 99 prices, in real dollars?

nada, while i essentially agree with you, there has been much less aid given to the jumbo market. yes, rates are low, but requirements are strict. i think you'll see the spread between the smaller and less expensive units and the bigger and more expensive units narrow. not all price points will be affected equally.

i also wonder how much more the gov't will be able to prop. if fha goes up in flames, as i expect it will, things could get interesting. and there's that pesky issue of unemployment. it's clearly the gov't's goal to extend, and i even understand why. i just don't know how successful they'll be in the long run. they seem to be doing very poorly in the foreclosure prevention arena. goals are one thing, successful execution another.

If I understand the cpi calculator correctly, (which again uses cpi as the basis) 100 in 1999 is 128 in 2009.

If nominal real estate prices basically doubled from say 100 to 200, then to get back to 1999 real prices (128 in today's nominal terms) you need the following: 25% drop we already had from 200 back to 150, and 15% cut to take prices further back 128.

that's my rough history-major-lawyer-turned-banker idea

does that make sense?...

Of course, rents are back to 2000 nominal prices in some cases, which is ....amazing really. So to get the rent/buy ratio back to 1999 would also require nominal sale prices to go back to 1999.

Floyd Norris had a column saying adjusted for inflation we were back to 1997.

he was discussing national figures. Nyc re prices are not back to 1997 in real terms, I don't believe.

RS, new york, nationally, rents or purchase? purchase we are not there yet. 15% sounds about right to me, and what i'd expect to see. i actually went through one time and figured it out on a ppsf basis, but the number escapes me right now. the risk of overshooting has probably been eliminated (for now, at least) by the gov't support.

When trying to generalize about the market, there is the issue of the insanely priced new development, stuff like caledonia, rushmore, etc. which would seem to have more to fall than anything, but who knows.

ar..when you write "15% sounds about right to me, and what i'd expect to see", that nominal decrease looks like what would take the average mkt back to 1999 real prices, but aren't you expecting bigger nominal falls than that in some areas....

In short, between net mortgage lending and existing mortgage management, the
Federal Government now completely dominates the housing mortgage market, with
the taxpayer shouldering the risk that had once been borne by the private sector.
-------------------------

who is going to pay for this? is it the taxpayer or the savers that invest on fixed income? the consequences could be complex though and favorable to unintended groups. for example, it adds to the debt and will bring the day of recognizing of the entitlement tsunami years earlier (along with the recession per se). that's a big plus for young people imho.

as taxpayers, those that earn the top 10% pay the majority of the taxes. their exposure to RE is around 5-10% of their total wealth and will be asked to support home prices on behalf of the middle class for which RE represents 50% of their avg net worth... maybe the wealthy profit from lifting prices indirectly? i don't see it. they have the dry powder to profit from pricing clearing. imho the wealthy that pay most of the taxes benefit by letting prices go down.

John Talbott, in "Contagion: The Financial Epidemic" says that real estate should go back to 1997 levels plus 30% for inflation. That is when real estate started to pull away from historic levels compared to wages. Perhaps Manhattan has become relatively more desirable - families are staying, more international buyers, wealthy people - especially those in finance got relatively more wealthy and want to be in Manhattan. I don't know how to factor all of that in.

Also, what do you think interest rates will do and what will this do to prices?

Some of this seems hard to generalize about - crazy new developments priced ??x prices ten years ago, east village walk-ups priced ??x ten years ago, ...it's hard to believe a scale-back to 1000psf or whatever in the ev leaves only another 15% or so before things are all hunky-dorry. I don't know. Tons of prices still seem nuts to me.

Even in 2000, when I declined the offer to buy the condo I was renting for 380k (similar units to which sold at 760 in 2007 i think) I thought prices were already too frigging high.

"real estate should go back to 1997 levels plus 30% for inflation"

only the rent inflation should be taken into account for this. "inflation" is too broad of a term. there's no reason why certain types of inflation should be reflected on home prices. on the contrary, certain types of inflation (like food inflation, health care cost inflation) have a DEFLATIONARY effect on RE as it relies on discretionary income.

I think people look at general inflation vs. re appreciation because it is relevant to the relationship betw re values and affordability (wages). Wage inflation can offset many types of inflation such as food...but if re grossly outstrips wage inflation that is a different matter

This reminds me of that joke.
'you know karate? Well I know crazy....'

you guys are all sitting there with your great analysis and CPI indicators, but how do you factor in 'krazy' into economic analysis? To me karate kid got no chance against crazy, did you see how crazy it got in 2007? Dog walkers buying $1mm NYC condos? Now that's a whole new level of crazy the likes of which I've not seen.

jim, i WAS overgeneralizing. we have many markets. hell, we have almost entirely new markets. you have your cookie cutter post-wars, your lofts, your classic 7s, etc. they were never priced the same. and you can't really do an apples to apples comparison of ppsf because all of the new product is "luxury" thus moving the median significantly. i've always said somewhere in the 1998 ballpark for prices, originally i meant real prices, but i'm not so sure. i didn't anticipate this level of gov't support. but i didn't anticipate quite this level of foreclosures either (although i should have, given my dour outlook for employment).

where new development will land at the end of the day is a huge question. i don't know, but i think it's safe to say that there will be some buildings that have units for sale at huge discounts. and i mean huge. others may only see movement if the owner can take a loss or there is a short sale, so we may only see comps in cases of distress or someone getting really lucky. some buildings will do relatively fine, people bought early enough in the process, and will be able to get out (at least in the near term, by 2012 i'm not so sure).

i think the easiest way to look at these prices, for manhattan at least, is to work with Miller's three categories: coops, condos and luxury. coops are straightforward. in condos include old and new up to a certain amount given size, and the rest of condos go in with luxury. it's not perfect but it's close. i wouldn't know where to put williamsburg condos, though. or even harlem. and then, i agree with you, you need to add and subtract for those features that became seemingly meaningless, like location, walk-ups, etc.

67 I hear you. The boom echo effect or whatever they call of it of krazeee is that people get confused and think that slightly less krazee (one less e) is somehow sane. That may account for recent bidding wars.

Nevertheless, we are not anywhere near it yet in my view, but..but..I do think there would come a point in NYC where residual demand would pop up, so i don't think we're heading toward a miami type crash. For example, I know expats who love NYC, some of whom were formerly based in NYC, who would buy something here for the hell-of-it but not at still krazeee prices.