Alex Pollack reckons finance professionals did believe housing prices could fall, but just not on a national level. The data used to stress test mortgage assets was based on the experience of Texas and other oil-patch states in the 1970s and 80s. It provided an instance of a housing bubble that led to falling house prices. The problem was, since the Depression, house prices had never fallen on a national level. There existed no data that contained a large and positive correlation of home price across different regions and also had prices falling. This is the limitation of historical data; you use the past to predict the future. When you enter a new regime you are left with your own ad-hoc judgement. Rather than take on that sort of responsibility, most prefer to base their assumptions on historical data.All the bankers had to do was look at Japan.
Wednesday, April 22, 2009
Why bankers assumed U.S. housing prices couldn't fall
From The Economist: