Economic Bubbles: Then & Now. By Hamilton Boudreaux

Transcription

1 Economic Bubbles: Then & Now By Hamilton Boudreaux

2 Economic Bubbles Historical perspective Economic theory What really happened Current examples & appraisal issues

3 What is an economic bubble? An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, or a speculative mania) is trade in high volumes at prices that are considerably at variance with intrinsic values.

4 Your 401-K?

5 Tulip Mania The first well documented economic bubble occurred in Speculative trade in Holland for tulip bulbs caused an explosion in the price of bulbs.

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7 Other Famous Bubbles The South Sea Company (1720) Mississippi Company (1720) English Railway Mania (1840s) Florida speculative building bubble (1926) 1920s American Economic Bubble (circa ) The Nifty Fifty American stocks of the late 1960s and early 1970s

8 More Bubbles Sports cards and comic books in the 1980s and early 1990s TY Beanie Babies (1996) The Dot-com bubble ( ) Japanese asset price bubble (1980s-1990 s) 1997 Asian Financial Crisis (1997) Real estate bubble (2008-?)

9 Economic Theory Modern economic cycles arise due to imbalances in supply and demand, and are intensified by central bank interventions.

10 HUH? Simply put, economic bubbles often occur when too much money is chasing too few assets, causing both good assets and bad assets to appreciate excessively beyond their fundamentals to an unsustainable level.

11 More Once the bubble bursts the central bank will be forced to reverse its monetary accommodation policy and soak up the liquidity in the financial system or risk a collapse of its currency.

12 Clear now? The removal of monetary accommodation policy is commonly known as a contractionary monetary policy. When the central bank raises interest rates, investors tend to become risk averse and thus avoid leveraged capital because the costs of borrowing may become too expensive.

13 Important Terms CMO = Colateralized Mortgage Obligation CDS = Credit Default Swap ( insurance ) CDO = Colateralized Debt Obligation Derivatives = Exotic unregulated financial instruments (the items listed above)

14 What Really Happened? The Federal Reserve held interest rates artificially low for an extended period of time which created a real estate asset bubble. This was a reaction to the Dot-com collapse.

15 Then... A judge in Ohio ruled that Deutsche Bank could not foreclose on some homes in Cincinnati unless they produced the actual mortgages. They held CMO s and could not.

16 Then... The derivative market collapsed (All those CMO s suddenly had questionable value). With the defaults the CDS s kicked in. Everybody remember AIG, Bear Sterns, and Goldman Sachs?

17 Then... The Treasury and Federal Reserve intervened and doubled the money supply almost overnight, AFTER Congress passed the TARP legislation to bail out the banks deemed too big to fail.

18 St. Louis Fed M-1 Updated 7/23/09

19 Then... The mortgage markets collapsed. Lenders got very scared. Buyers of real estate got scared and stopped buying. Unemployment began rising and foreclosures (from over leveraged owners) shot up.

20 Next?

21 Short Break

22 Part 2 Appraisal Issues

23 Current Mobile County Median Price -11%

24 Current Baldwin County Median price -17%

25 Current Mobile County Volume

26 Current Baldwin County Volume

27 Appraisal Issues There are a significant number of foreclosed properties in, and on the market at the present time. It is important to carefully verify sales data to exclude foreclosures, as these sales do not meet the market value definition of a willing seller.

28 Time Adjustments Negative time adjustments are just as valid as positive ones. Just harder to sell to juries who have been taught that real estate only goes up.

29 Summary History repeats itself! Appraisers must be extra diligent regarding foreclosed sales. You can download a copy of this from my web-site:

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