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"Stress Test" Lesson For President B.O. and Tim-the-Tax-Dodger Geithner



February 27, 2009 – Comments (3)

This lesson comes courtesy of the big brains at Calculated Risk.

When I first heard the 'worst case' scenarios that Timmay and his crew were running past the banks, to me they seemed pretty tame -- as in way too likely to be considered 'worst case.'

The above discussion confirms that opinion. Basically, it takes the worst-case home price drop scenario of the "stress test" regime that Timmay and crew are running, and plots it against historical price-to-rent ratios. Keep in mind that in the treasury's 'worst case' scenario, prices only undershoot to bring price-to-rent to 0.9, a range reached many times in the past in far better economic times. But that assumes flat rents -- which ain't gonna happen. The rest of the graph shows you price-to-rent at a couple of different falling rent scenarios, which immediately brings the ratio WAY up, meaning, simply, that if rents fall 10%, home prices are quite likely to fall a lot more than in the government's 'worst case' stress test.


I see rent reductions and specials all over this bubble-land, along with vacancies up the wazoo. And the changes proposed to the mortgage tax deduction for households making more than $200k will guarantee home prices keep falling, especially in high-cost areas such as D.C.

That's fine with me, but it's at cross purposes with the other government attempts to prop up home prices. The right hand either doesn't know what the left hand is doing, is too thick-headed to understand, or just doesn't care so long as the policy talking points sound good in the press.


3 Comments – Post Your Own

#1) On February 27, 2009 at 9:01 AM, djemonk (< 20) wrote:



It's friday.

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#2) On February 27, 2009 at 6:02 PM, jgseattle (26.15) wrote:

I do not understand all of this but I do know that in the height of the real estate boom in Seattle CAP rates for mulitfamilies were <3%. 

If rents drop people that invested at 3% returns are going to get killlllllllllllllled!

I think rents will have to come down.  As the rent/mortgage ratio closes in on 1 why would you rent?  (I know there are people who cannot qualify or whatever that have to rent but most are not in that position.)

So I still think we have 15-20% down in real estate and rents should fall at least that much.  I know there is an affordability index for housing that is graphed I wonder where that has to be at before it returns to normal after this bubble.


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#3) On March 02, 2009 at 4:10 PM, saunafool (< 20) wrote:

Down 30% more before it's over. That's housing.

Maybe 50% more down on the stock market.

Call me a pessimist, if you must.

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