Tuesday, August 05, 2008

Robert Shiller Interview: The Subprime Solution


Professor Shiller says the government should bail out homeowners. I generally disagree with him. Instead, I agree with Dean Baker's view that in bubble markets, trying to keep troubled homeowners paying their mortgages is actually harmful for them.

The video is about 20 minutes long. EconLog has a review of Shiller's new book here.

37 comments:

  1. Right on James! A decent chunk of buyer from the 2003 - 2006 period would be under economic hardship even if their mortgage payments were reduced 30%. It is better for most of these types to rent (or possibly buy a much cheaper housing unit.

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  2. dear Shiller,

    http://tinyurl.com/6bntrq

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  3. Right. His viewpoint here is just as off-base as his position that housing values in West Virginia are tied to the city of Washington's economy. (Hence the Case-Shiller index for "metro" DC)

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  4. "Right. His viewpoint here is just as off-base as his position that housing values in West Virginia are tied to the city of Washington's economy. (Hence the Case-Shiller index for "metro" DC)"

    Wait, you mean to tell me the bubble high priest could be wrong about something? Perhaps a little fact that just today, the Washington Post reported:

    "Home prices in the far suburbs, such as Prince William and Loudoun counties, have collapsed; those in the District and inner suburbs have stayed the same or increased."

    http://www.washingtonpost.com/wp-dyn/content/article/2008/08/04/AR2008080402415.html

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  5. Ok Neil/Spongeworthy,

    This is the point where you jump in and argue that suburban home 'substitution' will take place to drive down housing values in Washington, and that the high price of oil has nothing to do with real estate values.

    I know I certainly prefer to live in a 5500 square foot mcmansion in a cow pasture in Spotsylvania over a 2000 square foot brownstone in DC. (not really)

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  6. "prefer to live in a 5500 square foot mcmansion in a cow pasture in Spotsylvania over a 2000 square foot brownstone in DC."
    ----
    You can't afford either, so it really doesn't matter.

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  7. DC Resident and HomeownerAugust 05, 2008 4:22 PM

    "You can't afford either, so it really doesn't matter"

    LOL! I live in brownstone in the center of Washington. I've been in DC since 1992.

    Regardless, I hope that little jab you made helped you to feel better about yourself for a moment or two.

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  8. "Ok Neil/Spongeworthy,

    This is the point where you jump in and argue that suburban home 'substitution' will take place to drive down housing values in Washington, and that the high price of oil has nothing to do with real estate values."

    OR, you argue as he did back in January about Arlington:

    "I've watched people from 'high end areas' crying on couches because their homes lost 40% of their 'value' in nominal dollars before. Is not something I want to see again, but its coming."

    http://recomments.blogspot.com/2008_01_01_archive.html

    Arlington got to 500K at the peak. After 3 years of getting "blasted" its down about 9% from peak for the last 4 months or so. Yet im sure that that the other 31% he predicted will happen soon-- any day now...

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  9. Wasn't Neil "targeting" homes in "upscale" neighborhoods inside the beltway? Well, with the brutal beating that real estate values inside the beltway have taken over the past few years, Neil no doubt is busy snatching up multiple homes as we speak!

    Either that, or he's "at the gym"

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  10. "Neil no doubt is busy snatching up multiple homes as we speak!

    Either that, or he's "at the gym""

    LOL - I heard he quit his job at raytheon, and is applying to be the new Iraqui information minister (i.e. Bagdhad Bob with his failed predictions of beating the us forces). Neil's specialty will be predicting the price declines for Arlington & other close in neighborhoods.

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  11. Now boys, boys, lets ease up a bit on ole Neil here. Sure he was incredibly arrogant back when this was a viable, active blog, but he has dialed it back alot since then.

    Not too long ago, he even admitted on his own site that among all the bubble markets, he thinks DC is the one that is suffering the least pain (it turns out it looks like is right on that). Sure, its not an admission he was wrong, about Arlington but it is probably as close to one as you will get in the blogosphere - certainly better than "90% of areas are flat or increasing" Lance.

    Ive been his #1 critic for a while, but he has softened his views enough that I am willing to give him a pass here. Just my $0.02

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  12. I'm seriously disappointed in Shiller. He wants to blast us bubbleheads for being mean spirited toward irresponsible borrowers. Ok, fine, but the bailout bill and all other efforts aren't meant to help borrowers at all but to shift their worthless loans from the banks to the taxpayers.

    I'm worried that we're about to see a lot more of the unfortunately only partially discredited ideas of the New Deal and Shiller seems all for it. Nuts to him.

    BTW, for all of the 'Arlington will never fall people', median prices may only be down moderately, but sales are down 30%. That's masking the real drop in price per house as the less nice ones don't sell. I'm talking detached houses here. Condos are demonstrably down 20%. Go to the county web site and look at recent sales at 1021 Garfield or 880 N. Pollard.

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  13. anonywuss,

    I had a lemonade stand as a kid. On a hot day, I sold 100 glasses for 10 cents each. I felt rich. The next day was cold and rainy, and I sold 15 glasses, but I still charged 10 cents per glass. I wasn't going to give it away. Clearly, it was worth 10 cents since the price stayed the same. And since my lemonade was so uniquely refreshing and tasty, it was unthinkable that anyone would substitute icky tap water for it even if I charged $100 per glass. But I wonder what those customers drank after demand for my lemonade diminished?

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  14. "anonywuss said...

    BTW, for all of the 'Arlington will never fall people', median prices may only be down moderately, but sales are down 30%. That's masking the real drop in price per house as the less nice ones don't sell."

    Wuss, this is not the only way that shiller foresake the bubble heads. I love their explanation for the lower sales we see close in...

    "So even as overall sales volume drops, relatively stronger demand for housing will limit price declines in neighborhoods with shorter work commutes...Because of sharp increases in gasoline prices, living closer to work has become an even more important consideration in the location decisions of homebuyers"

    http://www2.standardandpoors.com/spf/pdf/index/052708_Housing_bubbles_collapse.pdf

    So apparently Arlington, Alexandria, and DC really are immune...

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  15. Shiller's analogy of the current housing correction to the post-WWI treatment of Germany is totally invalid. Retaliatory added financial burden placed on Germany is far from the same thing as simply not removing reckless borrowers' already existing financial burdens. And speaking of his desire to not "punish" people, why is it that he is concerned only with "not punishing" reckless borrowers? Why is he for punishing people who didn't borrow recklessly? Why does he want to remove reckless borrowers' financial burdens, and put it onto renters who have been saving up responsibly for homes that they can afford?

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  16. Lemonade is not fee-simple real estate in the city of Washington DC.

    Think about it, and if you need further details, please let us know.

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  17. Funny - the press and Professor Shiller have let the cat out of the bag, close in prices didn't plunge after 3 years of hammering and probably won't.

    This is such old news that Lance has given up repeating himself.

    A few die-hard BH's are still waiting, hoping, for that North Arlington choice home to fall 50%.

    Give it up. You can buy in Manassas and lurch on I66 to the jobs for 2 hours in the morning or you can find a job that lets you telework and battle against low bidders from Tennessee, West Texas, or India.

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  18. A couple examples of faulty logic in the lemonade example:

    1)One lemonade dealer owns all the lemonade. One entity does not own all real estate in one area.

    2)The lemonade dealer suffers the consequences of substitution. (tap water for lemonade.) The average homebuyer seeking a property inside the beltway is not going to substitute a home in West Virginia.

    There are more examples of the flaws in that analogy. Please advise if you'd like to read them.

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  19. That's masking the real drop in price per house as the less nice ones don't sell.

    If it doesn't sell, it doesn't sell and there is no transaction price associated with the property. Therefore, the last sale price stands as a matter of record.

    It doesn't matter if the owner WANTS to sell it. It only matters if it is sold, or foreclosed. Otherwise, it is what it is.

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  20. "But I wonder what those customers drank after demand for my lemonade diminished?"

    I wonder where people are living now that the volume of real estate transactions is lower than it was a year ago? I guess they're all in the street?

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  21. DC Resident and Homeowner said...

    Oh look! I changed the title of my posting name, and that is evidence that I am what I say I am.

    It is amazing how many people on the Internet have a dream home, a dream job, or something they think everyone else wants.

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  22. DC Resident and HomeownerAugust 06, 2008 1:49 PM

    "Oh look! I changed the title of my posting name, and that is evidence that I am what I say I am."

    Hypocrisy. You say that I cannot afford a home in DC. Do you not see that you are a hypocrite?

    The basis of your doubt is likely the fact that you yourself are a liar. Not everyone needs to lie on a blog to feel better about themselves.

    In fact, doesn't it make sense that a DC homeowner would visit this blog regularly?

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  23. In fact, doesn't it make sense that a DC homeowner would visit this blog regularly?

    Are you nuts?! Why would a homeowner be interested in the topic of home ownership!? No DC homeowner has ever visited this site; especially not one named Lance.

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  24. If you are own property, and you are convinced prices here are going to skyrocket forever, why would you even bother with a blog dedicated to the opposite view?

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  25. yes, I bought in 2003; 30 yr fixed rate at 5.5%August 06, 2008 4:04 PM

    "and you are convinced prices here are going to skyrocket forever"

    Who said anything about prices "skyrocketing forever"? Those are your words. Someone (apparently a homeowner) posted a Case-Shiller Futures estimate showing approximately a 3% increase for Washington in the coming year. That certainly isn't "Skyrocketing" appreciation.

    You might want to try to remove your emotions from your interpretation of the facts. You'll see things more clearly.

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  26. "If you are own property, and you are convinced prices here are going to skyrocket forever, why would you even bother with a blog dedicated to the opposite view?"

    Mostly to laugh at all the renters who think DC will have Manassas-type-prices if they wait long enough. Its fun, and it passes the time while at work - try it some time!

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  27. "Its fun, and it passes the time while at work - try it some time!"

    I do. I've been yanking the chains of you queens all week. It's hilarious!

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  28. "1)One lemonade dealer owns all the lemonade. One entity does not own all real estate in one area."

    Wrong. One home owner owns all of his home, much like the lemonade stand owner owns his stand. Unless a real estate sale is distressed, the homeowner, like the lemonade seller, is not compelled to sell until he gets his asking price. This is why real estate sales have diminished: sellers are anchoring to peak prices and buyers are simply not as willing to buy at those prices as they were at peak. The emotional component of price anchoring is denial, which I suspect is also why so many anonymous housing bulls post here. And please let me know if you need further explanation as to the meaning of price anchoring.

    "2)The lemonade dealer suffers the consequences of substitution. (tap water for lemonade.) The average homebuyer seeking a property inside the beltway is not going to substitute a home in West Virginia."

    One need not go as far as WV to see a price correction. It's disappointing that one who would lecture me on flawed analogies couldn't do better than this. Inferior goods substitute for superior goods if the price differential is sufficient enough; in that regard, water substitutes for lemonade and Fairfax County real estate would substitute for Arlington if Fairfax prices fell sufficiently. Avoid the trap of arguing that there is no substitute for Arlington, since that's a loser; rather, your best argument is that prices in areas outside of Arlington won't fall enough to compel buyers to substitute anything else for their little slice of Arlington heaven. In any event, the MRIS data indicates that the correction is moving inward.

    "There are more examples of the flaws in that analogy. Please advise if you'd like to read them."

    Ah, yes, after all we've seen in the past year, it's a delight to argue with somebody about the housing bubble. It's like going to a religious chat room and arguing about whether the earth is 6,000 years old.

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  29. "Terminator-X said...
    Wrong. One home owner owns all of his home, much like the lemonade stand owner owns his stand. "

    But yet, in your example you said "On a hot day, I sold 100 glasses for 10 cents each. I felt rich. The next day was cold and rainy, and I sold 15 glasses, but I still charged 10 cents per glass"

    So does the homeowner own 1 home the first day that he sells and another on the rainy day? Or perhaps he had 100 "housing units" well call them, and then 15 housing units the second day??? Sorry, but your analogy doesnt work. Its ok though - we all make mistakes, just admit your analogy wasnt all that great.

    "Terminator X said...
    In any event, the MRIS data indicates that the correction is moving inward."

    Still peddling that "moving inward" crap? How about its moved in and just not all that big of a drop?

    "Terminator X said...
    The emotional component of price anchoring is denial, which I suspect is also why so many anonymous housing bulls post here."

    Or did you ever think that we are just so childish that we get off antagonzing housing bears who cant stand to leave well enough alone? Its so easy sometimes, we leave a little bait out there, and they alwyays come back to dispute it - DANCE PUPPET DANCE!!!!!

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  30. So you admit your "arguments" and "evidence" are complete shit and totally contrived, so no one should believe anything posited by bulls on this site. Thanks for clearing that up.

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  31. Child, the lemonade dealer sells individual glasses of lemonade. He sells one glass, then another, then another.

    Homeowners sell one home, and that is all.

    See the difference? You don't, do you? That's pretty sad.

    Next:

    The substantial price corrections; the corrections which would compel buyers based SOLEY upon price alone, are in the outer ring suburbs. The corrections in the outer ring have been happening for years.

    Can you point to evidence that homebuyers (they still exist) are making purchases in the outer ring? Or are the homes sitting empty?

    The answer is that they're sitting empty, which means substitution is not happening.

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  32. " meaning of price anchoring."

    We will start with a refresher for you on the concept of "Unit Pricing".

    Then we'll discuss "Production Volume"

    Then we'll tie unit prices and production volume into the following models:

    1) The lemonade stand and
    2) Individual home sellers

    If that doesn't help you, then we'll go into the notion of "Perishable Goods" and tie that into the models listed above. How about Cost of Goods Sold? And Economies of Scale and their affect on unit pricing? (Lemons, water, sugar and perhaps a disposable cup v. One single completed home with utilities, a certificate of occupancy, and a plot of land)

    I get the feeling I'm arguing with a college student or a recent grad, who takes copious notes but doesn't yet have the wisdom to apply theory to reality.

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  33. Ah, my trained cadre of circus seals. Piping up right on cue.

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  34. The narcissistic anonybulls sorta turn me on when they get so angry. Actually, I think it's just one very passionate and, well, just plain sexy narcissistic anonybull. Thanks for not using CAPS LOCK too much; I would not have been able to restrain myself. I can't quit you! Time for a cold shower.

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  35. "theta-equis said...
    I think it's just one very passionate and, well, just plain sexy narcissistic anonybull"

    Ill admit - I am so immature ive done this before. Not this time though. There are 2 and possibly 3 or 4 of us doing the tweaking this time around.

    So good job Corky...extra fish for you...now go back to your stand and twirl on my cue...

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  36. You misunderstood, the fish are for the housing pumpers.

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  37. So the dancing puppets are the bears and the seals are the bulls. Got it!

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