Kate O'Sullivan, CFO.com | US
December 4, 2009

it's just another 18-year real estate cycle

Same as all the prior land price collapses: 1819, 1837, 1857, 1873, 1893, 1914, 1932, (1955), 1974, 1991. Caused by bank created credit used to finance speculation in the capitalised rent of land. The largest gains come always in the second half of each cycle, once the banks have recovered. Expect this after 2016, same as all previous cycles.

Posted by phil Anderson | Jan 2, 2010 11:23 PM ET

Way Looking Forward

Great Q&A on the status of the ecomomy. Makes sense and sums everything up looking forward. This should be posted on everones refrigerator for reference.

Posted by James Blackwell | Dec 10, 2009 10:16 AM ET

Property Markets and the Business Cycle

The authors write: "We'll see housing prices resume their decline at some point, and the collateral values are just not going to be there, and the ability to sell will remain compromised."

The most important observation is that the proper reference is to property prices. The portion of property values that is subject to boom-bust cycles is the underlying location values. A major cause of the economic downturn was credit-fueled inflation in land prices.

This has always been a central cause. However, deregulation and extensive fraud in the financial sector made this crash even worse than that of the late 1980s. By the late 1990s, the mortgage loans purchased and secured by the GSEs, by FHA, and by the FHLBs were increasingly secured by volatile land values and less and less housing value. In some high cost markets (e.g., San Francisco, Washington, DC, Boston, New York) the median land-to-total value ratios revealed on property appraisals was well over 50% and frequently as high as 80%. A crash under such conditions is inevitable.

The proliferation of private placement mortgage-backed securities collaterized by minimally underwritten (or fraudulently documented) mortgage loans accelerated the collapse and made it deeper than it might otherwise have been.

One of the first steps that ought to be taken to prevent a repetition of this boom-to-bust cycle is to pass banking regulations that prohibit any institution that accepts government-insured deposits from making loans for the acquisition or refinancing of land. This is the only measure that will protect bankers from themselves, and protect the nation from having to tax ourselves (or print more money) to bail out the bankers yet again.

And, of course, the longer run policy solution is to make location rents public revenue by means of a high effective rate of taxation on land values.

Posted by Edward Dodson | Dec 9, 2009 4:21 PM ET