The public records will show the original loan balance but not the present balance. The value for a specific home is something Zillow gets really wrong in many locations. Given those two facts how do we think Zillow has estimated the negative equity?

Something like 20% of the homes are purchased for cash. No idea if these are long term buyers or mostly investors doing short term deals which later get resold or refinanced. How might the free and clear properties distort the guesstimate of negative equity Zillow has come up with?

When it comes to short sales it makes a big difference if the borrower is current with their loan payments. Many folks facing negative equity are looking at a temporary condition. A few more payments or a bit of a rise in the market and they are right side up. Hence a map of negative equity might be a clue for pockets of short sale opportunities but it is a not a hard indicator. I would also consider the employment picture. If people are finding it hard to keep a job and the employment trend is negative then there will be more people looking to bail. The same with the divorce rate for the area. Folks who want out of the relationship and at the same time have an upside down house.

John Corey

Housing prices are falling from a peak in 2006, but the appreciation leading to that peak was caused by Greenspan’s Fed’s loose-money policy. We’re falling from that peak because Bernanke isn’t Greenspan; there isn’t enough credit available for people to refinance their homes and avoid foreclosure. So I think that the Fed is (was) indirectly responsible for the drop in property values.

Thanks for posting, by the way. I appreciate your pushing back and making me think.

Do you have portfolio recommendations at this time?

http://www.chartoftheday.com/20070720.htm?T

Oil normally rises due to a crises and falls in a recession.

Allen Taylor

I agree with some of what you’re saying and would like to address your comment one point at a time. Please feel free to push back at it; that’s why the comments area exists.

“These are not contradictory. A credit crunch is not directly inverse to inflation.”

You’re right - they’re not direct inverses of each other. But I think what you wrote next is consistent with what I’m saying:

“Also, core inflation (not including food and energy) is actually pretty well contained. And there is little likelihood of secondary inflationary effects–higher wages–kicking in and structuralizing in higher prices. One, recession would bring smaller bargaining power to employees. Two, productivity has been decling since the 90’s and left little justification for wage increases. The Fed is more concerned about GDP growth over inflation presently.”

I agree that core inflation is contained and that a recession will keep prices down.

I don’t think we’re going to see an inflationary recession. Neither do you. So do you have a problem with my statement that expectations of high inflation and a non-inflationary recession are in conflict with each other?

“It’s unfair to blame Greenspan as the culprit of the housing bubble. There were many factors contibuting to the housing bubble. Predatory lending, lax financial regulation, performance seeking firms which disregarded the high risk of mortgage related securities, euphoria accompanying any boom period, and many, many others.”

Yes, that’s true. And I think Greenspan’s expanding the money supply is what made the credit available to do predatory lending and make risky investments. It’s not just me who thinks this. The bankers in my real estate group have been making similar statements for half a year now.

If Greenspan wasn’t responsible for these things, what made lenders and investors suddenly want to take all of these risks?

“Commodities price rises tend to be correlated highly with periods of great industial activity. The US, China, India, Russia, Brazil all have experience industrial growth and expansions of their economies. Commodity prices typically rise after this happens, which is what is happening now. One might ask why there why there’s been such a lag between industialization and commodity price increases.”

Yes, I agree. I think you’re saying that commodities had been undervalued before, and I think that’s true. But do you think this is inconsistent with what I’ve been saying? The housing bubble drove what appeared to be an expansion of our economy, driving commodity prices up. Now I think we’re entering a period of contraction (recession), which ought to drive commodity prices down.

“why are you writing economics darren, anyway? it’s not your field and it shows. the rest of what you right would strike anyone who’s take econ 1 as incompetent.”

I understand why you could think so. What I’m saying is very different from what people are saying in the media. But as far as I can tell, I can’t see many places where what you’re saying is actually inconsistent with what I’m saying.

I think it’s worth asking how “field” is to be defined. I moved to Oklahoma City in September 2006 because I thought the housing bubble was going to pop. I told everyone I knew that this was going to happen, but no one else moved. Some of them refinanced their homes and bought rental properties in Florida and Texas.

Now the market is bearing out what I said was going to happen all along. The people who bought in the last two years have lost their equity and, in most cases, owe more than their homes are worth. I’m working on four short sales in California right now as well as a few in my own town.

There are three criteria that are important for me in deciding whether a writer is property addressing a field of study:

(1) What does the Bible say about any particular field? Is that writer’s analysis consistent with Biblical principles?

(2) Does he respond to comments and criticism or ignore what people are saying to him?

(3) Does he succesfully apply his theories to the world? In the case of economics and finance, do his theories successfully explain market behavior and tell us which direction markets are moving? Do people make money from his theories?

That’s why I welcome comments and am happy to hear what you have to say. Please keep writing!