A Second Hand Conjecture

The Economist
Interesting article about the roots of the problem. What I found fascinating was this root cause.

the historical accident of a very low loss rate during the early history of subprime mortgage foreclosures in 2001-2002.

This is the reminder that “accidents” continue to happen and that our best models are always suspect. Lesson learned - events will continue to occur that challenge conventional thinking and assumptions. Some short term data (an accident) led investors to believe there was less risk and uncertainty.

This idea can be extrapolated to all models that try to describe large complex systems - like AWG.

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From a post at the Minneapolis Star Tribune’s buzz.com describing the impact on neighborhoods in Minneapolis of the spiraling number of foreclosures. Each pin is a foreclosure. 725 total in North Side. (HT: Instapundit)

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(cross posted at Risk and Return)

Paper Economy has taken a close look at what it will take to get inflation adjusted housing prices in Massachusetts back to trend over a five year period. It should be noted that for this to happen sooner the decline would have to be deeper (due to inflation doing less of the work for us.)

The following chart (click for much larger version) shows that in order to bring Massachusetts “real” home prices (as tracked by the OFHEO home price index for Massachusetts) in-line with the average annual return of 2.5% seen since the early 1970s, nominal prices have to complete a 16.8% decline (or 28.8% in “real” terms) from the latest peak.

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