REALTOR® University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24

8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24

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Financial Cycles and Real Estate

Alex J. Pollock

REALTOR University LectureOctober 16, 2014

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Financial CyclesAbout every ten years, we have the biggest crisis in 50 years.

-Paul Volcker

The banking failures for the current year have been numerous,greatly aggravated by the collapse of unwise speculation inreal estate.

-Report of the Comptroller of the Currency, 1891

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Political and Regulatory Overreaction

In 1360, Francesh Castello, a failed banker, wasbeheaded in front of his bank.

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Cycles of Prices and Leverage

What is the collateral for a mortgage loan?

How much can a price change?

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50

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

I n d e x

The U.S. Housing Bubble:Case-Shiller National Home Price Index Values

1987-2014S&P Case Shiller U.S. National Home Price Index

Case-Shiller Trend (3.3% Annual Growth Rate)

2006 Q2, 189.93

Trend Line

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7

0

50

100

150

200

250

300

350

400

450

500

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5

International ComparativeHousing Bubbles

Ireland

UK

Spain

US

Denmark

Canada

Years After PeakYears Before Peak

Source: Bloomberg


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50

100

150

200

250

300

350

400

450

500

550

600

650

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

P r i c e I n

d e x

( 1 0 0 =

6 y e a r s

b e

f o r e p e a

k )

Comparative Bubbles: NASDAQ v. House Prices

Years Before and After the Peak of the Bubble

NASDAQ

Case-Shiller Home Price Index

NASDAQ: Peak to Trough= 71%

Case-Shiller: Peak to Trough= 32%

+ 2.5 yrs

+3.00 yrs

-3.25 yrs

- 2.75 yrs


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0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1 9 5 0

1 9 5 2

1 9 5 4

1 9 5 6

1 9 5 8

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0

2 0 1 2

2 0 1 4

10-YR Treasury Note RateFearful Symmetry

1950-2014


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Its Easier to be Brilliant than Right

The mercantile community will have been

unusually fortunate if during the period ofrising prices it has not made great mistakes.Such a period naturally excites the sanguineand the ardent; and the ablest and cleverestthe most .

- Walter Bagehot, 1873

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Its Easier to be Brilliant than Right 2

There is nothing so disturbing to ones judgment as to see a friend get rich.

I can calculate the motions of the heavenlybodies, but not the madness of people.

-Isaac Newton

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Risk is the price you never thought you would have to pay

For example:

Fannie Mae and Freddie Mac

Total Profits 1971-2006: $106 billion

Total Losses 2007-2011: $256 billion

Net Results 1971-2011: $150 billion loss

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Housing BustsRecent authority:The duration of housing price declines has been long lived, averaging

roughly six years. -Carmen Reinhart and Kenneth Rogoff

Ancient authority:Pharaoh had a dream: out of the river there came up seven cows,

sleek and fat, and they grazed among the reeds. After them, sevenother cows, ugly and gaunt, came up out of the NileAnd the cowsthat were ugly and gaunt ate up the seven sleek, fat cows.

-Genesis 41

Loans which cannot be repaid will not be repaid. -Pollocks Law of Finance

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Failures of Imagination

Many things which were considered impossible nevertheless came to pass.

-Freeman Dyson

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46%

62% 64% 65%

20%

30%

40%

50%

60%

70%

80%

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Source: United States Census Bureau

100-Year U.S. Homeownership Rate1910-2014


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23%

68%64%

20%

30%

40%

50%

60%

70%

80%

1918 1939 1953 1961 1971 1981 1991 2001 2011

Source: United Kingdom National Statistics

England Long-Term Homeownership Rate1918-2011

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20%

30%

40%

50%

60%

70%

80%

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Source: United States Census Bureau

100-Year U.S. Homeownership Rate1910-2014

U.S. Housing Finance Eras

FirstHomeownership

Campaign

Golden Age of S&LsAge of Fannieand Freddie

CollapsingBubbleYears

?

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The Role of Government

The subprime mortgage problems are contained.

-Common official statement, 2007

We had no choice but to fly by the seat of our pants, making itup as we went along.

-Secretary of the Treasury Paulson

about the financial crisis

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The Role of Government in Housing

Finance (and in general)Two Theories

Adam Smith J.M. Keynes

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The Pollock Proposal

Adam Smith 90% Normal Times

J.M. Keynes 10% Times of Crisis

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The Cincinnatian Doctrine

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Adam Smith90%

J.M. Keynes10%

Normalcy


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The Cincinnatian Doctrine

The Key: Withdrawing after the crisis

The Model: The Roman Hero Cincinnatus(flourished 5 th century B.C.)

The Modern Cincinnatus: George Washington

Contrast: Dodd-Frank, Fannie-Freddie, Fed

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0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

G e a r y - K

h a m i s

d o

l l a r s

Source: Maddison Project

U.S. Per Capita Real GDP since 1900

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In Sum

The capitalist process progressively raises the standard of life of themasses. It does this through a series of vicissitudes.

-Joseph Schumpeter

A period of transition is a period between two periods of transition. -Jacob Viner

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Documents

REALTOR® University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24