Are Home Prices the Next "Bubble"?
by Jonathan McCarthy & Richard W. Peach
FRBNY Economic Policy Review, December 2004
by Ole Bear
The Emperor's New Clothes
From "Are Home Prices the Next "Bubble"? page 17 [See also page 1]:
The views expressed are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of
New York or the Federal Reserve System. The Federal Reserve Bank of New York provides no warranty, express or implied,
as to the accuracy, timeliness, completeness, merchantability, or fitness for any particular purpose of any information
contained in documents produced and provided by the Federal Reserve Bank of New York in any form or manner whatsoever.
This latest scribe from the Boys at the NY FED is a real hoot and a holler! With the NY FED disclaimer on page 1 and on
page 17 of this position paper, I wonder why they even bothered to publish this position paper at all. Our metals and
investment broker friend in St. Louis puts the icing on the German Chocolate Cake:
Regarding that "invisible" housing bubble, it wasn't that long ago that their "clothes-less" Chairman told everyone
that "it was impossible to see a bubble before it pops!" Now, if that is so, how can the NY FED tell us they see
everything clearly, and no bubble exists? -- Wistar Holt, Holt & Shapard Capital Management, LLC, St. Louis, Missouri.
There is no real point in going through why these authors' position paper looks and smells like a Swiss Cheese. Their
observation on page 1 of the position paper that home prices have only risen 36% since 1995 tells me these rascals
cannot work a Hewlett Packard 12C Financial Calculator, are wearing some extremely thick rose-colored glasses, and that
they flunk New Math 101.
On page 2, the authors say: "Our main conclusion is that the most widely cited evidence of a bubble is not persuasive because it fails to account
for developments in the housing market the past decade. In particular, significant declines in nominal mortgage
interest rates and demographic forces have supported housing demand, home construction, and home values during this
period. Taking these factors into account, we argue that market fundamentals are sufficiently strong to explain the
recent path of home prices and support our view that a bubble does not exist."
This paragraph is hilariously funny and indicative of the authors' waltz through the Poppy Patch. The authors fail to
define value for real estate and market price for real estate. It appears that they confuse price and value as being
equal. They are not equal. They fail to see the correlation of either as defined by the ever increasing amounts of
Federal Reserve Notes being issued. There appears to be a direct dis-connect that Chairman Greenspan has the dubious
distinction in our view of being the Greatest Monetary Charlatan since John Law. Not only do the authors fail to realize
that the GSEs are most likely run as criminal enterprises in the negative return black market economy, but that the GSEs
are bleeding like stuck pigs in their loan loss portfolios, and that they are all under-capitalized. The authors fail to
address the fact that real estate with a building improvement on the land, is a wasting physical asset, i.e., one that
depreciates over time. That's OK -- www.appraisalinstitute.org
has forgotten that as well. The authors fail to comment on the GSEs ability as part of the banking cartel to rig the
realty valuation industry for their own gains, similar to the Big Boy Lenders like Union Planters, Countrywide,
Washington Mutual, Bank of America, and a whole Mississippi Delta Slough of Others, through their manipulation of the
realty valuation industry using their own appraisal management companies. The authors also did not mention how the GSEs
operate as second tier central banks through the process of money market mutual fund intermediation. The authors fail to
mention that the Federal Reserve system through FIRREA 1989 has corrupted and basically run the realty valuation
profession into the ground since 1989, and have simply put, destroyed a profession. The authors fail to mention the
systemic risk to the financial system by the banking cartels' use of the AVM [Alternative Valuation Model] in lieu of a
full realty appraisal to help secure the mortgage loan on real estate. Calculating a PE ratio for real estate based on
rents for single family homes is about as absurd to "prove" that there is no market bubble as saying that the RMS
Titanic was unsinkable. The authors must have learned this hedonic trick from the BLS!
On Page 9, The Structural Housing Model is absolutely priceless -- and deserves everyone's devout attention as the Gospel according to Saint NY FED. News on
the street has it that Harvard Business School will be teaching this stuff next semester along with REIT 101, and How to
Make $1 in Real Estate!
I am somewhat of a very poor Methodist and a Heathen at that, but as a Christian believer, I accept that Jesus Christ is
the Son of God in this body of faith and organized religion. The NY FED authors might as well have told me in their
position paper, that in the Christian Faith, there was no resurrection on the third day. Saint NY FED has spoken.
There you have it, Folks -- there is no real estate bubble -- wishing will make it so.
Ole Bear, Editor
© 2004 Realty Reality