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Same Logic For "It Is Priced Into The Market"



October 11, 2009 – Comments (8)

Big Picture has a wonderful example of how people think in terms of home pricing.

I have found when I have asked people how they value things they almost never have a fundamental reason.

Certainly if you look at the housing market I did not understand at all how it kept going up.  Before Greenidiot I'd studied the housing market fairly well.   I had it all worked out how you get ahead.  It worked out best if you saved for a down payment because of all the interest you'd save and because you'd get interest on your down payment money until you bought a house.  That was conventional wisdom and the world would have been a better place had it remained true.

But, a Greenmoron was given power and probably governments saw saw what he was doing as helpful to their burdening budget problems, and interest rates were gradually lowered over a 20 year period.  How was I to know that what had been would no longer hold true because of artifical and destructive market manipulation?

So, what happened is that logical people would have said the housing prices were unreasonable and questioned how people could afford them, but the declining rates made the higher prices doable, at least in the short term.

And those that tried to follow conventional wisdom were totally screwed.  Home prices were going up much faster then you could save a downpayment.

So, previously far more irresponsible behavior was rewarded, little money down and you were in and you made a bundle from appreciation, it you were in early enough.

Each new generations tends to see what happened to the generation just above them the best, so, when I was urging my niece to not buy, well,  housing went up another 10% from where I started urging her to not buy and where she jumped in. 

I remember talking to this young guy serving me in a restaurant and he was "lucky" to have gotten his 700 sq ft apartment for something in the low $200k region and he was concerned about the developer trying to screw him out of his "deal" as he bought pre-construction and the market was up 15% prior to completion.

What was interesting to me was that even with evidence of what was happening elsewhere, people still believed that a price correction would not happen here.

I'd say the same is true for the market.  Many people do not have fundamental reasons for an investment.  I do have to hand it to some people, they know what they are buying is crap, but they are "reading" the market hype and just riding the hype.   Certainly the ultra low rates from waiting on the side encourage people to look for better returns.

I was burned on both housing and the market when I was younger and I have no desire to repeat either of those experiences.  The market is priced insanely expensive. 

8 Comments – Post Your Own

#1) On October 11, 2009 at 7:56 PM, dwot (29.67) wrote:

Here's an interesting one, from Mish:

"How do I act in the new environment? There aren't any ready answers for that," said Mansco Perry, chief investment officer for Maryland's pensions. "But I have difficulty throwing away 30 to 40 years worth of knowledge and practice and say that doesn't work anymore."

Mish: I have a clue for pension managers: Understanding the paradigm of the last 30-40 years is indeed worthless. It is a serious mistake to assume the next 30 years will be anything like the last 30 years.

This Mansco Perry seems clueless the degree to which the gradual lowering of rates have changed things, and how much that artifically inflated returns.  Certainly I was clueless about it until I started doing research on the market, however, if investments is your business, it is a disgrace to not understand the effects of low interest rates in the economy and the degree of mal-investment that it causes.

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#2) On October 11, 2009 at 8:09 PM, portefeuille (98.32) wrote:

A Bounce? Indeed. A Boom? Not Yet.

By ROBERT J. SHILLER Published: October 10, 2009

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#3) On October 11, 2009 at 8:45 PM, starbucks4ever (89.25) wrote:

dwot, you are too early. Simply too early. Realize this: it's always a horrible idea to short something just because it's overpriced. We almost certainly will see Dow 14000 before Dow 8000.  Be greedy when others are greedy and be fearful when others are fearful, just don't remain stubborn when the mood begins to change.

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#4) On October 11, 2009 at 9:35 PM, portefeuille (98.32) wrote:

just noticed that the article you linked to is about the article I linked to.

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#5) On October 11, 2009 at 10:43 PM, edbbear (< 20) wrote:

This has frustrated me too.  Our politicians saw a way they could gain if housing prices appreciated to absurd levels.  Higher taxes could be collected, which led to bigger budgets, which led to more political power.  Not to mention higher prices led to more lending and cash-out re-fis which led to more consumer spending which led to higher GDP. 

 I am single with no debt and have a solid job and just want to buy a small single family house in a nice area.  Unfortunately, those areas near my employer are out of my price range.  I can't afford $250,000 for a house, particularly with real estate taxes in the neighborhood of $10 grand a year.  I have to be content with renting and saving as much as I can.  Hopefully Bernanke won't destroy the dollar before I buy some silver bullion. 

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#6) On October 11, 2009 at 10:47 PM, dwot (29.67) wrote:

Lol portefeuille :)

sloj, I have been early in every call...  I wasn't working full time when playing the stock market and writing my earlier analysis of different things.  I call myself conservatively greedy and I am not so greedy as to take what I see as unreasonable risks. When I started in 2006 the DOW was at about 10,700 and now it is 9,800 and I am up well over 200%.  Early calls have not hurt me at all.

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#7) On October 12, 2009 at 5:05 PM, davejh23 (< 20) wrote:

There is no logic in real estate evaluation.  I'll agree that the stock market is insanely expensive based on recent earnings.  However, in general, the stock market is forward looking.  Whether the market is being driven up by inflation expectations, improved earning expectations, or greed, I don't know.  However, eventually, the market will show more reasonable P/E ratios...whether through increased earnings, or decreased prices. 

However, real estate markets are not forward looking.  We've had unusually low mortgage rates for a decade, and everyone expects mortgage rates to increase at some point.  I expect rates to increase to 7-8% at some point, and never return to 5-6% again.  They may top 10% for a time.  Every 1% increase in mortgage rates decreases affordability by about 10%, so shouldn't the expectations of higher rates be "priced in"?  The "Greenmoron's" manipulation that you describe only worked because Americans are collectively greedy and don't make purchase decisions based on logic.  My best guess is that the stock market rise continues to be fueled by greed...not more logical reasoning.  I don't necessarily expect a "crash", but the market as a whole is not fairly priced right now.

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#8) On October 12, 2009 at 5:25 PM, outoffocus (24.06) wrote:

I think the same factors holding up the stock market is holding up the real estate market. Its all about psychology.  Its not a matter of matching prices with fundamentals as much as its because prices are still X% below what they were 2 years ago and hence constitutes a "bargain".  People are buying at these prices because they are afraid they will "miss the bottom".  Its kinda the same logic that happend with gas prices.  Once gas prices surpassed $4 a gallon, $3 became a bargain. Heck gas prices are around $2.40 right now.  I remember when $2.40 was considered expensive.  Now its a bargain.

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