“could this be the first asset bubble in history to not revert to the mean”

Have you seen the historical graph by Shiller? It showed that home prices climbed by 60% (national average) in 1943-1947. After that, prices stayed flat through the 70s! Not even the 1958 or 1968 recessions made prices drop. Even the OPEC-driven recession of 1973-1974 had no adverse effect on RE prices.

No one knows what will happen in the near future. I’m expecting house prices to drop, but I may be wrong, as there are many factors at play. It would be naive to expect the RE cycle to necessarily behave like the last two downturns (early 80s and early 90s), when history shows that each cycle has different timing and dynamics.

“Probably there was a fundamental reason for the price increase: larger houses, rising incomes, greater productivity, introduction of loan program which raised demand and allowed more homeownership, etc. ”

My Theory : #1 The rise of women in the workforce during WWII and subsequent increase in dual income families in the following decades.
Without any stats or back-up I believe this to be the primary cause of the large post-war shift upward in the home prices per the Shiller chart, resulting in a new higher plateau from post WWII to 2000.
Rates are secondary.

Lowering the rates didn’t do a thing for Japan’s market, except maybe extend the length of time it took to correct.

Stabilizing the interest rate won’t do anything (locally) for the people who are both fully extended and are facing an ARM reset. It isn’t going to bring an infusion of job or wage increases, and it won’t restore the misconception among the gambling class that RE always goes up and never goes down.

This last aspect is the one that’s most telling. A buyer has no incentive to bet everything on a purchase unless they’re confident the short term pain is going to have an outsized long term gain. Without that kind of upside they’ll avoid the risk.

The current buyer psychology is already in motion. In my opinion, the only thing that could make it reverse course right now is….nothing.

socalarm – that works if and only if the house’s market value has not depreciated below the original loan amount. This probably won’t help option ARM loans. Even if it does help reset the loans, we are just adding time to when the bomb goes off.

Suppose I have an ARM at 5.5% that resets in late 2007. ARMs are tied to short-term rates. Suppose that the index to which my ARM is tied drops to 3% and the margin is 2%. My ARM payment just went DOWN to 5% from 5.5%.

If re-setting ARMS higher causes negative pressure on real estate and the economy, won’t re-setting rates lower cause positive pressure on real estate and the economy ?

Even if the ARMS don’t reset to lower than the current rate, the fact that if rates reset to 5-6% versus 7.5-8% makes a huge difference in the impact on the borrower, their free-cash flow, and the economy.

Yes, the interest rate does have an impact. Lower rates will dampen the fall, higher rates will hasten the fall.

If you believe that ARM resets to higher rates will negatively impact real estate and economy, then why is the converse not true ? Simple logic.

rocketman –

Wouldn’t lower rates would reduce the number of bankrupcies since it would improve the balance sheets of many borrowers. Sure, the overextended 0% down option arm people are screwed, but reduced rates would aid the balance sheet of many potential bankrupcy cases than increased rates.

I guess it depends on the timing and extent of potential rate drops relative to the ARM re-set time bombs.

My guess: rates drops would dampen the severity and lengthen the time for prices to fall.

Nor_LA-Temcu-SD-Guy

Lose lending standards, artificially low rates are what has got this country onto the verge of bankruptcy , Now is it wise to continue making more Americans go further into Debt than they can ever pay off (only renting from the bank in the form of interest only). Making it basically impossible for young people to get ahead.

Does not seem a wise choice , but neither was it to get us into the place where we find ourselves now.

Sad to say but having artificially low rates is like holding Candy out to a six year old while his mother is telling him it is not good for you. What do you think the six year old will do ???