Thursday, July 23, 2009

"We needed a recession"

Thoughts from Harvard economist Jeffrey Miron:
By the end of 2005, it should have been apparent that the U.S. economy was fundamentally misaligned. We had significantly overinvested in housing and significantly underinvested in factories, plants, and equipment. In effect, we needed a recession: a period to readjust the balance between the different types of capital.

More broadly, failure is an essential aspect of free markets. Failure shows capitalism is working, because it means resources are moving from bad uses to good uses.

49 comments:

  1. These guys are way smarter than I am, but seeing that giant US factories are closing shop and housing prices are way more than someone working at a factory could afford, I would say capitalism isnt working at all.

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  2. Failure is definitely part of capitalism. The problem is when there is such broad failures which means that the economy was very misaligned.

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  3. "These guys are way smarter than I am, but seeing that giant US factories are closing shop and housing prices are way more than someone working at a factory could afford, I would say capitalism isnt working at all."

    House prices where? In San Francisco, no. In Youngstown OH, yes. In Potomac, no. In Anacostia, yes.

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  4. to those who say capitalism has failed ... I say, you're wrong. We haven't had a capitalist society for quite some time.

    The fact is that the finance industry and the housing industry are heavily regulated, and you have people making shitloads of money by exploiting the loopholes. In addition, you also have quasi-government entities like Fannie Mae and Freddie Mac are significantly responsible for the bubble that should have failed a long time ago if we were in a capitalist society... and on the finance side- the big banks knew that we wouldn't let them fail. And so they participated in ever riskier ventures so that they could make money.

    We have a system (to use a cliche) where gains are privatized and losses are socialized, and we have had this for quite some time. That's not capitalism to me.

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  5. Last anon is right.

    David. We have had very little failure, and the assets never passed from weak hands to strong hands.

    Think about this: we have had the world's largest housing bubble ever with massive overinvestment, and not a single major homebuilder has gone bankrupt... despite new home sales going down some 70%.

    Chuck

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  6. "Think about this: we have had the world's largest housing bubble ever with massive overinvestment, and not a single major homebuilder has gone bankrupt... despite new home sales going down some 70%."

    Contrary to popular opinion, major homebuilders constitute only 20% of the homebuilding market. The market is dominated by hundreds upon hundreds of smaller companies.

    The washout amongst the smaller companies has been catastrophic they were the "weak hands" in the equation.

    The Strong Hands are the majors who thanks to economies of scale and huge cash reserves, were able to withstand this the most severe downturn in homebuilding in 70 years.

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  7. "House prices where?"

    Anywhere. Anyone who worked at a GM factory can not afford to buy a house even in thailand.

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  8. New WSJ report out - here are the highlights:

    "Memo to those wondering when the housing slump will end: It depends on where you live.

    The Wall Street Journal’s latest quarterly survey of housing-related data shows that the market for residential real estate is healing at varying speeds in different parts of the country. The Northern Virginia suburbs of Washington, D.C., and many areas in California that are near employment centers have shown signs of stabilizing, housing analysts say, while the outlook in other places—much of Florida, Detroit and Las Vegas—still appears bleak.

    In the Washington, D.C., area, government-related employment has held up and helped revive housing demand, says Jody Kahn, an analyst at John Burns Real Estate Consulting, a research firm. “Good locations in Alexandria and Fairfax [Va.] are seeing some emerging price stability and even small increases,” Ms. Kahn says, and Maryland’s Montgomery County “is showing price stability.” More remote suburbs will take longer to recover, she says.

    Thomas Lawler, an independent housing economist in Leesburg, Va., says areas that seem to be nearing stability include San Diego, Sacramento, Minneapolis, Boston and the Virginia suburbs of Washington.

    Of course, there are lots of variations within metro areas. The most appealing neighborhoods, offering short commutes and good schools, may VASTLY OUTPERFORM marginal areas that thrived during the boom."

    Remember those fools like Leroy who thought areas like Immunington and Immundria would take a big fall if you simply rubbed your hands together and wished hard enough? Remember how he keep insisting, its coming, any day now, you just wait - substitution effect will drag em down!!!

    I hope he sees this. I hope it infuriates him as his predictions continue to fail miserably one by one by one. The fact of the matter is the DC immunozones will be the ones to VASTLY OUTPERFORM the exurbs as this thing plays out. Turns out, my buing in the immunozone back in 2004 was the best decision I ever made.

    http://online.wsj.com/article/SB1000142405297020490090457434113429149316.html#articleTabs%3Dcomments

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  9. "Remember those fools like Leroy who thought areas like Immunington and Immundria would take a big fall if you simply rubbed your hands together and wished hard enough? Remember how he keep insisting, its coming, any day now, you just wait - substitution effect will drag em down!!!"

    Well, lets be clear, these areas have seen declines - albeit very slight.

    The thing I found most amusing was that even during the time of peak declines in the immunozones they still kept saying, "its coming, any day now".

    THey couldnt accept that the biggest declines the immunozones would ever see was staring them right in the face. Talk about clueless!!!

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  10. "Turns out, my buing in the immunozone back in 2004 was the best decision I ever made."

    I don't understand why there are so many people looking for validation on home purchases (especially ones made 5 years ago).

    I'm the guy that sold you my home 5 years ago, used the cash to buy Google, rented a studio for 4 years, sold Google at its peak, now I own a small island. Best decision of my life.

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  11. "Anywhere. Anyone who worked at a GM factory can not afford to buy a house even in thailand."

    Seriously, what the hell are you talking about? Heres a house in Detroit Mi thats move in ready and costs $8,500

    http://www.realtor.com/realestateandhomes-detail/20090-Strasburg-St_Detroit_MI_48205_1110373280

    In fact, if you look, there are 1,587 homes for sale in detroit for under 10K. Some are as cheap as $30.

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  12. "Neilist said...The thing I found most amusing was that even during the time of peak declines in the immunozones they still kept saying, "its coming, any day now".

    THey couldnt accept that the biggest declines the immunozones would ever see was staring them right in the face. Talk about clueless!!!"

    BWAHAHAHA!!!!!! Ah memories! Yeah I remember that well.

    Early on when I argued in 04 prices wouldnt go down much the boo birds came out in droves:

    "Oh so you think your place is IMMUNE?"

    I was a newbie then and didnt know what to say so I pretty much shut up. I did note how much better the neighborhood was because of gentrification, but this too was dismissed:

    "See, you just think "its different here" - everyone thinks their neighborhood is "different" or "special" when I can assure you its not."

    I believed them for a while, but then when I saw that the exurbs were imploding while my house was doing just fine I thought, gee maybe my place will be ok.

    Thats when the "just wait its coming, any day now" calls started. After 1 year of that I realized these guys were full of shit. Then I sat back patiently waiting for evidence of the bottom to see how they would react - let them hang themselves on their own ignorance.

    Now that day has come - John Burns and Tom Lawler were early doomers - calling for a bursting back in 2005. Now they are saying not only is my place OK it is going to VASTLY OUTPERFORM the rest?

    God damn!!! Vindication is SWEEEEEEET!!!

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  13. The funny thing is, lots of people who bought are arguing prices will never drop. The people who havent bought dont care, cause prices HAVE dropped and they didnt lose anything at all.

    Regardless if you think prices will drop a lot or not, one true constant remains. Prices in your area will NEVER EVER GO UP!!!! NEEEEEEEVVEEEER!!! What you paid for your house, will be what you will sell it for 35 years from now.

    Great investment with inflation and all! $700K will be just enough to buy a loaf of bread and a gallon of milk (or your 800 square foot row house) in 2040! lol

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  14. "Great investment with inflation and all! $700K will be just enough to buy a loaf of bread and a gallon of milk (or your 800 square foot row house) in 2040! lol"

    Actually if inflation was that bad, home prices in the immunozone would be about 10-15 million dollars. Id rather take his (current $5,000 mortgage) over any renter than paying say $350,000 per month.

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  15. Fredotodobene - you are understating it quite a bit arent you.

    Anon said bread and milk is 750K and homes are only 10-15 million, rents $350,000?

    More than likely, the immunozone home would actually be worth 300-400 million and rents close to 10 million a month.

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  16. Well, I am assuming if inflaiton is running that high, bank loans have 2-300% interest, meaning volume has slowed to a trickle so it wouldnt be the traditional lending instruments available today. Thus, I am discounting the price accordingly.

    Still you are right, even without bank loans, between installment sales, and "rent to own" schemes like we had in the pre-fed days, the guy's immunozone home would be worth more than 10-15 mill.

    Even with my discount for lack of liquidity, guys immunozone home would be worth easily 100 million. Maybe I should have said Id rather have this guy's 5,000 a month mortgage over the renter's rent of probably 2 million a month.

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  17. "Then I sat back patiently waiting for evidence of the bottom to see how they would react - let them hang themselves on their own ignorance."

    Good for you, Anon 7:39. I'm with you there. It was obvious that Immunington and Immundria were not a bubble over a year ago but the trolls clung to their madness.

    The evidence - prices held during 2006, 2007, 2008. That trumps any bleating of "Just wait".
    The backlog did increase by a large percentage but the total number of for-sales was always small.

    The reason - Most people have better things to do with their lives than sitting in traffic on I66.

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  18. "Actually if inflation was that bad, home prices in the immunozone would be about 10-15 million dollars"

    I think you missed the point. Prices will not go up for at least 50-75 years at the prices things are currently. They are peaked for a very very long time. The only way prices will go up is if a loaf of bread costs you $500.

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  19. Guys, I work in IT with a salary of $90K. I also own my own business and spend my entire evenings and weekends working, and that also brings in about $50K. My wife also brings in $60K.

    So we make $210K a year and if I were to buy a home with 20% and 3 times my salary, which is normal, I couldnt even expect to buy a starter home!

    Yep, my plan is to build my personal business, quit my local job and move to somewhere like Florida. The DC area kinda sucks anyway.

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  20. The reason - Most people have better things to do with their lives than sitting in traffic on I66

    Funny how there are so many folks out there who can't seem to wrap their minds around this simple concept.

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  21. "So we make $210K a year and if I were to buy a home with 20% and 3 times my salary, which is normal, I couldnt even expect to buy a starter home!"

    I think you mean "I couldnt even buy a starter home WHERE I WANT TO LIVE". You all seem to forget there are huge swaths of the DC area that were once truly bubbilicious that are now are bargain basement affordable.

    Take this place

    http://franklymls.com/PW7089661

    There is nothing fundamentally wrong with this place - a reasonable amount of space and a safe area. In my hood, this place would cost 850K. The tradeoff of course is time - you dont want to live this far away and apparently neither does anyone else, hence they pay 850K.

    Its part of the tradeoff of living in this area time vs money. There are literally thousands upon thousands of places like this, so please spare me about how you cant afford ANYTHING!

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  22. He's waiting for this house to go on sale in Potomac @ $250k. It's inevitable, you know, because he really, really wants it to.

    And hope, after all, is the best plan.

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  23. to Anonymous 928... I hear ya. I'm in the same boat.. except I profited from the bubble by selling my house in Maryland way back in 2006 because of a divorce.

    Even with THAT money I could use as a down payment and my six figure salary, I still think that prices are way too high around here.

    As for me, I'm going to California. For the price of a one bedroom in DC in the nice places, I can buy a 2BR blocks from the beach in San Diego. It seems like a no brainer.

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  24. Great post - I really like you page!
    COMMON CENTS
    http://www.commoncts.blogspot.com

    ps. Link Exchange??

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  25. "think you mean "I couldnt even buy a starter home WHERE I WANT TO LIVE". "

    No I meant what I said. The DC area sucks. I dont want to move to Gaithersburg MS13ville.

    Looks like Im going to go for a 6 bedroom 4 bath on waterfront property instead of a 2 bedroom townhouse in cracktown.


    "He's waiting for this house to go on sale in Potomac @ $250k. It's inevitable, you know, because he really, really wants it to."

    Dont flatter yourself. Potomac is pretty crappy compaired to living on the beach practically retired too.

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  26. "think you mean "I couldnt even buy a starter home WHERE I WANT TO LIVE". "

    No I meant what I said. The DC area sucks. I dont want to move to Gaithersburg MS13ville."

    No, as I said before and you confirmed, you COULD afford to live in MS13ville, you just dont WANT to live in MS13ville

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  27. Anonymous said...

    "Actually if inflation was that bad, home prices in the immunozone would be about 10-15 million dollars"

    I think you missed the point. Prices will not go up for at least 50-75 years at the prices things are currently. They are peaked for a very very long time. The only way prices will go up is if a loaf of bread costs you $500.

    July 24, 2009 9:24 AM
    **************

    I remember Professor Shiller stating that historically houses go up annually about 2 to 3% above inflation. So perhaps home prices will return to that norm. From 2009 to 2012 I expect prices to remain flat, and then in 2013 for them to return to the norm.

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  28. Anon 4:01, Neihlist, Anon 7:39,

    He's still wearing the clown suit and is in fine form. Click the quote for the full text:

    "... Lance ... ran off when his statements became sufficiently absurd that he had become a running joke. At the time he left he was claiming that "90% of the region is holding steady or climbing" ... "

    Lance said a lot but my recollection is that he expected things to play out as they have. The Immunozone has weathered the storm just fine.

    My small place in Immundria is worth much, much more than the 2000 assessment. It might be 5% off the absolute peak valuation in 2006 but who cares.

    I have a short commute to work. I can walk to good restaurants. The neighborhood is picturesque with large old trees.

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  29. Anon 9:28, "Yep, my plan is to build my personal business, quit my local job and move to somewhere like Florida."

    I've thought about that too.

    I'm not certain that my skills and business are unique enough that clients would still contract to me, as opposed to someone in China or India.

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  30. "I'm not certain that my skills and business are unique enough that clients would still contract to me, as opposed to someone in China or India."

    Well I work in IT, but my personal business is not. Do something that China or India couldnt. Better yet, if you do something that can be outsourced to India, YOU OUTSOURCE IT. The deal makers are the ones with the money, peon grunts in the fox hole work in mud and filth and eventually die of disease or get shot down.

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  31. "No, as I said before and you confirmed, you COULD afford to live in MS13ville, you just dont WANT to live in MS13ville"

    I could live in a cardboard box under a bridge too. Lets be realistic, someone that makes $250K a year shouldnt have to worry about driveby shootings. Grow a brain.

    I don't care to argue semantics, point is if you churn out a couple of million every couple of years and still cant buy a starter home in a middle class area, you need to move to somewhere that offers homes in middle class areas cheaper.

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  32. Anon 7:46, good points.

    I will consider my options.

    Right now, in spite of the economy, I am doing OK.

    I have friends who are not. Those in IT have seen work go overseas.

    Others who are in construction, retail, food service have seen their business drop off.

    The last year or two has been a butt-kicker for many in my circle of friends. We're not whining, we help each other, share the pain and the wealth.

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  33. "I could live in a cardboard box under a bridge too. Lets be realistic, someone that makes $250K a year shouldnt have to worry about driveby shootings. Grow a brain."


    I agree. Thats why I suggested he live here

    http://franklymls.com/PW7089661

    There is nothing fundamentally wrong with this place - a reasonable amount of space and a safe area. In my hood, this place would cost 850K. The tradeoff of course is time - you dont want to live this far away and apparently neither does anyone else, hence they pay 850K.

    And thats where the whining about "I cant afford anything" comes in...

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  34. My my aren't the trolls out in force this morning?

    Look at me!

    Look at me!

    I own a tiny house in an expensive neighborhood!

    I am a success!


    This guy's point stands. Why spend a fortune to buy a crappy house in a mediocre city when he could take his money and productivity and go somewhere better?


    People aren't toadstools, they can get up and move and historically, that is what the smartest and most productive of them have done.

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  35. "People aren't toadstools, they can get up and move and historically, that is what the smartest and most productive of them have done."

    Correct, certain industries get priced out of areas all the time. Areas around the West Hamptons were once a haven for aerospace workers. Now that seems laughable.

    If alot of you just dont think the tradeoffs in space or distance or crappiness arent worth it, thats fine - that means you were priced out by those who make more money than you do and value those places more than you do. Its a sad fact, but it happens.

    If it gets too severe, the economy stifles, the city gets cheaper, and the workers come back (or they get paid more). If it doesnt, it wont, and you will, unfortunately, be priced out forever.

    So please, by all means, leave and go to the moderately price areas - laugh at us who spend a ton of money to live in crackerboxes - the same way that the blue collar set who live in extremely cheap areas will laugh at you for foolishly spending 300K in a moderately priced area. The cycle continues...

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  36. lol

    Ah yes, naturally anyone who goes somewhere better with their money is doing so because they are "priced out."

    The reality is actually nearly completely reversed.

    It is the better educated, more wealthy, and more productive people who tend to be more mobile.

    These are the people with the good sense and the resources to do what the poster was considering doing. Evaluate their options and make an informed decision.

    The poster above makes good money, significantly above the median in this area. He could buy, he just sees better options in other places.

    "Gee, should I buy a mediocre little house, or should I buy a far nicer home in a far nicer neighborhood with a better quality of life somewhere else?"


    Most of the trolls on this board love the idea of high real estate prices because it lets them convince themselves that they are successful.

    "Wow, in MY neighborhood this would cost a hojillian dollars!"

    It is a sad sort of elitism basically. They want to believe they are part of some kind of an exclusive club because they live in an expensive area despite not being prosperous themselves.

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  37. "It is a sad sort of elitism basically. They want to believe they are part of some kind of an exclusive club because they live in an expensive area despite not being prosperous themselves."

    It probably makes writing that $3000 check every month for a 2br house or condo a little less painful.

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  38. "lol

    The reality is actually nearly completely reversed.

    It is the better educated, more wealthy, and more productive people who tend to be more mobile."

    Im pretty sure you have it backward. You seem to assume an area gets expensive. When this happens, the mobile, wealthy & educated move to a less costly area.

    If so, who is there to make and maintain the city as an "expensive" area in the first place? In a way, your argument sounds like yogi berra "that place is so crowded, nobody goes there anymore".

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  39. "Those in IT have seen work go overseas. "

    I dont know what you are talking about...the government and its contracts with the likes of northrop grumman, csc and other IT fields would NEVER EVER EVER hire anyone overseas. We all have security clearance. Only someone completely ignorant of government work or computers would say such a thing. If you arent in IT or bio jobs here in DC, you probably dont have a good paying job.

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  40. "I agree. Thats why I suggested he live here

    http://franklymls.com/PW7089661

    There is nothing fundamentally wrong with this place"

    Other than it not even being in the right state that he was talking about? Why not list a house in Michigan while you are at it? Maybe the guy works in Annapolis. You morons who think things arent overpriced dont realize theres other places besides VA.

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  41. "Other than it not even being in the right state that he was talking about? Why not list a house in Michigan while you are at it? Maybe the guy works in Annapolis. You morons who think things arent overpriced dont realize theres other places besides VA."

    There are places in Charles and Calvert Co., MD as nice, cheap, and safe as this. Its a hike, but people do it all the time.

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  42. "I dont know what you are talking about."

    AOL, Sallie Mae, Fannie Mae, Freddie Mac all sent work overseas.

    Hope that helps.

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  43. "AOL, Sallie Mae, Fannie Mae, Freddie Mac all sent work overseas.

    Hope that helps."

    They should get a government job in DC. The private sector is for chumps in this economy.

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  44. p.s. pass it on to your friends

    Hope that helps.

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  45. "pass it on to your friends"

    Private has been better in the past but not so in the last few years.

    Two have applied for government positions but it takes time.

    Thank you.

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  46. We all have security clearance. Only someone completely ignorant of government work or computers would say such a thing. If you arent in IT or bio jobs here in DC, you probably dont have a good paying job.

    Seriously.

    And I love the accusation of "troll" being thrown around. It's pretty amusing coming from folks who do nothing but bang out angry little screeds about how they're "not going to live in this *STUPID* expensive area anymore" and how they're "going to move to a beach somewhere where it's nice!!"

    I can't wait til they finally give up on the "reversion to the mean" (i.e. $150k 5 BR detached houses in Cathedral Heights) and just move already.

    It's unseemly.

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  47. Cool, a post full of weak strawman arguments.

    Just in time too, we were running low on those.

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  48. strawman arguments

    Not to sound overly sensitive, since you didn't say if you were responding to my post, or something earlier, but just in case you were responding to me... I'm not sure the phrase "strawman arguments" means what you think it means.

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  49. "I can't wait til they finally give up on the "reversion to the mean" (i.e. $150k 5 BR detached houses in Cathedral Heights) and just move already."


    How about you make a list of posters who have made the above prediction?

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