5 comments on “Another housing bubble?

  1. “it was constrained by some unannounced limit on the size of its balance sheet.”

    “Since the 1930s, we have tried a fundamentally different approach to stopping runs and financial crises, emphasizing minimal equity and lots of debt. When depositors run, really the only way to stop it is for the government to guarantee debts9. But, once people expect debt guarantees, banks take on too much risk, and their creditors lend without regard to that risk. So, we tried to substitute regulatory supervision of asset risk for both ends of market information processing and discipline. It’s not enough, we have another crisis, guarantee more debt, and so on.”

    There’s an unquantified, political friction on increases in the fed balance sheet. The current zeitgeist has ideas about distributing illegible risks between different entities. Externalities tend to get pushed into illegible dimensions over time which build up into systemic risks. And how effective a system is at moving these risks around would be nice to measure.

  2. What can you do to profit from the bursting of a housing bubble? Did you do it in 2006? Did the timing work out well?

    You linked to 3 posts: one from 2004-10, where you were not ready to declare a peak, another from 2005-09, in which you were about to position yourself for a peak, and the last from 2006-01, without comment. By the time of that post, had you followed through on your 2005-09 plan?

  3. Romeo,
    I don’t see a clear connection between the limits to bailouts and the limits to open market operations. See this Sumner post explaining why there’s no systemic risk from large Fed balance sheets, merely a risk of an awkward situation where the Fed loses money while the Treasury gains money.

    I made some money shorting homebuilders such as Toll Brothers and Centex from late 2005 through early 2008. I also lost some money on AIG (not realizing how much it was exposed to housing prices), and lost some money by shorting financial institutions such as Countrywide Financial (not having enough confidence to maintain those short positions for long enough).

  4. Thanks!

    Sumner’s graph doesn’t have a labeled axis. Other copies suggest that the plateau was maybe 1/2006-3/2007. So you called the top pretty well. Why did the plateau last that long? When people say “bubble” there is an implication that when it bursts, it will be abrupt. But I guess the seasonal nature of home sales may make it hard to notice a plateau or fall. (This graph is seasonally-adjusted.)

    I don’t know how to get historical stock data for companies that no longer exist, so I don’t know what the story was with Countrywide (or Centex). It looks to me that Toll Brothers’ bubble half burst before housing even plateaued. It ultimately only fell back to its 2003 price and I’m surprised it didn’t fall farther. Maybe the market priced the same declining market into both Toll Brothers and Countrywide, but took more years to recognize that defaults would destroy the bank.

  5. Douglas,
    Toll Brothers was more sensitive to the number of houses sold. Countrywide was more sensitive to the number of houses whose price dropped below some threshold.

    I’d rather not have “bubble” imply much about the suddenness of decline. Housing prices decline more slowly than stocks because it’s hard to sell short houses, and because other constraints on liquidity slow down reactions to supply/demand changes.

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