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Old 2011-06-23, 04:20   Link #14371
SaintessHeart
NYAAAAHAAANNNNN~
 
 
Join Date: Nov 2007
Age: 29
Quote:
Originally Posted by Bri View Post
You'll get a Nobel prize if you have a sure way of detecting bubbles. There are always industry analists claiming a lot of things, but the problem was that the US housing market did not seem over-valued at the time based on the available data. In fact house prices in western europe were a lot higher at the time. The scale of fraudulent behaviour by mortgage providers wasn't fully know untill the crisis started. Nor did anyone expect that the derivative market could create such a spillover effect on the whole financial system.
It isn't the housing bubble, but rather a speculation on borrowing and mortgage bubble. The housing market may not seem over-valued at the time because types of houses are diversified, thus making it difficult to have a standard price for valuating against. Plus that most of the mortgages are ARMs which have a prime plus risk interest, and that the prime interest rose due to increased borrowing and thus hiking the repayment rate, the overall interest significantly increased and thus reducing the home-buyer's ability to repay the mortgage, resulting in a fear of mortgage bonds, hence a extensive short-selling that resulted in the financial crisis.

I suspect it is the use of P/E ratios that resulted in the "over-valuation" of the houses. Those aren't exactly accurate because they are too speculative, the "value" given is based too much on either past or potential earnings (trailing/forward respectively).
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