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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Financial Cycles and Real Estate
Alex J. Pollock
REALTOR University LectureOctober 16, 2014
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Financial CyclesAbout every ten years, we have the biggest crisis in 50 years.
-Paul Volcker
The banking failures for the current year have been numerous,greatly aggravated by the collapse of unwise speculation inreal estate.
-Report of the Comptroller of the Currency, 1891
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Political and Regulatory Overreaction
In 1360, Francesh Castello, a failed banker, wasbeheaded in front of his bank.
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Cycles of Prices and Leverage
What is the collateral for a mortgage loan?
How much can a price change?
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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50
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1 9 8 7
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1 9 9 0
1 9 9 1
1 9 9 2
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1 9 9 7
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1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
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2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
I n d e x
The U.S. Housing Bubble:Case-Shiller National Home Price Index Values
1987-2014S&P Case Shiller U.S. National Home Price Index
Case-Shiller Trend (3.3% Annual Growth Rate)
2006 Q2, 189.93
Trend Line
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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0
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-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5
International ComparativeHousing Bubbles
Ireland
UK
Spain
US
Denmark
Canada
Years After PeakYears Before Peak
Source: Bloomberg
8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
P r i c e I n
d e x
( 1 0 0 =
6 y e a r s
b e
f o r e p e a
k )
Comparative Bubbles: NASDAQ v. House Prices
Years Before and After the Peak of the Bubble
NASDAQ
Case-Shiller Home Price Index
NASDAQ: Peak to Trough= 71%
Case-Shiller: Peak to Trough= 32%
+ 2.5 yrs
+3.00 yrs
-3.25 yrs
- 2.75 yrs
8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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0%
2%
4%
6%
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1 9 5 0
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2 0 0 0
2 0 0 2
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10-YR Treasury Note RateFearful Symmetry
1950-2014
8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Its Easier to be Brilliant than Right
The mercantile community will have been
unusually fortunate if during the period ofrising prices it has not made great mistakes.Such a period naturally excites the sanguineand the ardent; and the ablest and cleverestthe most .
- Walter Bagehot, 1873
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Its Easier to be Brilliant than Right 2
There is nothing so disturbing to ones judgment as to see a friend get rich.
I can calculate the motions of the heavenlybodies, but not the madness of people.
-Isaac Newton
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Risk is the price you never thought you would have to pay
For example:
Fannie Mae and Freddie Mac
Total Profits 1971-2006: $106 billion
Total Losses 2007-2011: $256 billion
Net Results 1971-2011: $150 billion loss
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Housing BustsRecent authority:The duration of housing price declines has been long lived, averaging
roughly six years. -Carmen Reinhart and Kenneth Rogoff
Ancient authority:Pharaoh had a dream: out of the river there came up seven cows,
sleek and fat, and they grazed among the reeds. After them, sevenother cows, ugly and gaunt, came up out of the NileAnd the cowsthat were ugly and gaunt ate up the seven sleek, fat cows.
-Genesis 41
Loans which cannot be repaid will not be repaid. -Pollocks Law of Finance
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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Failures of Imagination
Many things which were considered impossible nevertheless came to pass.
-Freeman Dyson
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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46%
62% 64% 65%
20%
30%
40%
50%
60%
70%
80%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: United States Census Bureau
100-Year U.S. Homeownership Rate1910-2014
8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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23%
68%64%
20%
30%
40%
50%
60%
70%
80%
1918 1939 1953 1961 1971 1981 1991 2001 2011
Source: United Kingdom National Statistics
England Long-Term Homeownership Rate1918-2011
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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20%
30%
40%
50%
60%
70%
80%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: United States Census Bureau
100-Year U.S. Homeownership Rate1910-2014
U.S. Housing Finance Eras
FirstHomeownership
Campaign
Golden Age of S&LsAge of Fannieand Freddie
CollapsingBubbleYears
?
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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The Role of Government
The subprime mortgage problems are contained.
-Common official statement, 2007
We had no choice but to fly by the seat of our pants, making itup as we went along.
-Secretary of the Treasury Paulson
about the financial crisis
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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The Role of Government in Housing
Finance (and in general)Two Theories
Adam Smith J.M. Keynes
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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The Pollock Proposal
Adam Smith 90% Normal Times
J.M. Keynes 10% Times of Crisis
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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The Cincinnatian Doctrine
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Adam Smith90%
J.M. Keynes10%
Normalcy
8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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The Cincinnatian Doctrine
The Key: Withdrawing after the crisis
The Model: The Roman Hero Cincinnatus(flourished 5 th century B.C.)
The Modern Cincinnatus: George Washington
Contrast: Dodd-Frank, Fannie-Freddie, Fed
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
G e a r y - K
h a m i s
d o
l l a r s
Source: Maddison Project
U.S. Per Capita Real GDP since 1900
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8/10/2019 REALTOR University Speaker Series Presentation: Financial Cycles and Real Estateor University Speaker Series Alex Pollock Financial Cycles and Real Estate 2014-10-24
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In Sum
The capitalist process progressively raises the standard of life of themasses. It does this through a series of vicissitudes.
-Joseph Schumpeter
A period of transition is a period between two periods of transition. -Jacob Viner
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