Monday, February 23, 2009

Update on "Gradual Decline Before the Crash"

Last July 12 I posted here on both old and recent work of mine on modeling how most bubbles experience "period of financial distress" after a peak during which they gradually decline for awhile before crashing. I noted the declines in deriviatives markets, identifying August 2007 as the peak. I warned of the danger of a crash, while holding back from outright forecasting one or when it might occur. Well, it occurred in mid-September with the general global meltdown after the failure of Lehmann Brothers, and was followed by a pretty steep crash of stock markets around the world.

I also note that housing continues to follow my forecast, that it is in a gradual decline since its peak in mid-2006, with no sign of a full-scale crash, although we are pretty clearly still well above a bottom. The other pattern for bubbles, of a crash immediately following a peak still looks like what happened to oil this past summer. Again, for the record, in the fourth edition of his Manias, Panics, and Crashes, of the 47 historical bubbles identified by Charles Kindleberger in his Appendix B, 37 of them followed the "period of financial distress" pattern, including all the really big ones, with the remainder about evenly split between the other two patterns.


Anonymous said...

Re: Housing
We sold in Palo Alto last Oct and have been looking around in local market areas. We don't see much in the way of decline in prices asked. In our desired market area asking is still in the $500/$1000 per sq ft area. Our original idea was to sell our overpriced house and downsize to a condo/townhouse and have a cash cushion. Well so far that idea isn't working.
From the disaster porn I have been reading, prices should be going down. All that is happening is days on market are staying high. We have been looking at flipper fixers, nicely done for sure, but they are holding out for %500 per ft. I guess location location location still holds.

TheTrucker said...

The banks aren't lending because they are using all their money and all the money they can get out of the government to hold on to the homes they have repossessed. They and the government seem to think that by simply holding on to the assets they can stop the decline. And maybe they can. Given that the stimulus will actually work to cause wage push inflation then they will be right. However, that does not seem to be the case. Unemployment is rising and wages are not.

cian said...

Anonymous: The experience in the UK has historically been that housing crashes are driven first of all by forced sellers (death, divorce, bankruptcy, job loss), and that the remainder of sellers can remain in denial for a surprisingly long time. Prices remain high, but very little sells.

Shag from Brookline said...

Speaking of bubbles, is there an "Antiques Roadshow Bubble"? Do viewers buy into the values attributed to "stuff" on the show and think that their "stuff" is also valuable? said...


There are always local exceptions within the national housing market trends. Where I am in the Shenandoah Valley of Virginia, there never was a bubble runup and so now there is not much of a decline, although sales are down about 25% on a year ago, kind of the phenomenon cian notes.

Also, you are talking a pretty wide range of prices for floor space, and where do you think the floor should be?

Finally, just this morning I heard on the radio that nationwide, housing prices declined more in the last quarter of 2008 than during any previous quarter. Maybe we have hit bottom, but the last time I looked at the Case-Shiller index, it was still above the levels of price-to-rent ratios that hold over the long term. So, probably still some ways to go, even if it is not showing up in Palo Alto.