Tuesday, October 9, 2007

The Spin (Smith) Doctors

Dr. Margaret Smith and Dr. Gary Smith
Famous last words: "When is a Housing Bubble Not a Housing Bubble?"

That was the title of a paper written by the good doctors. The answer to the question is fairly simple. A housing bubble is not a housing bubble when...
- appraisals are not fraudulently increased,
- mortgage lenders are honest and trustworthy,
- mortgage lenders verify applicant information,
- mortgage-backed securities are backed by credit worthy loans,
- realtors honestly advise their clients on affordability,
- buyers are realistic about what they can afford,
- and buyers understand the consequences of their actions.

What did the doctors conclude in their paper?

The relevant question, however, is not how much prices have increased in the past or how fast people expect them to increase in the future, but whether, at current prices, a house is still a fundamentally sound investment. Our answer is yes, even if the owner either buys for keeps (with no assumptions about futurehouse prices) or makes conservative assumptions about future housing prices.

2006-04-01: Housing Bubble? What Housing Bubble? April Fools!!!
2006-04-16: Is there a bubble? Do the math

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