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Banana Republic: Interactive Crises of Real Estate, Employment and Law

The first is Price. As I have been writing for a year now, RE remains 8-15% overvalued. I have been using numerous ratios to reach that conclusion (Price/Income, Housing stock/GDP, etc.). As Robert Shiller, co-founder of the S&P/Case-Shiller home price index, stated at a NY conference yesterday, a further decline in property values of 10-25% in the next five years “wouldn’t surprise me at all. Shiller added “There’s no precedent for this statistically, so no way to predict.” Let’s take that fall a step further: When using price ratios (as I like to do), we have a tendency to focus on the numerator (the top part of a fraction). In this case, that is Home Prices. However, prices in a ratio can remain overvalued if the denominator — the bottom number — changes as well. In this case, that is Income. This means that if wages stay flat or fall, or if the total number of people working ticks downwards, Houses can can remain overpriced. This is true EVEN AS HOME PRICES FALL. That is the nature of ratio — both numbers matter. The legal issue, which we started pounding the table on back in October 2010, continues to fester.The toxic combination of MERS and Robo-signing has led to a backlash against foreclosures both int he media and amongst judges. The WSJ has belated discovered this. In a June first article, Banks Hit Hurdle to Foreclosures, the apparent problem with MERs transferred Title has become recognized, as delinquent borrowers have alerted courts that mortgage companies which cannot prove they own the loans do not have the right to foreclose. Called “show me the paper” cases, these have been successfully defended in California, North Carolina, Alabama, Florida, Maine, New York, New Jersey, Texas, Massachusetts and others. I have been a strong advocate for Foreclosures (More Foreclosures, Please . . .), but ONLY when they are done legally. This may come to a shock to some Libertarians and the editorial staff at the WSJ, but Property Rights and Due Process actually matter in countries that are not banana republics.

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