Wednesday, September 06, 2006

Risk and Housing to the mean

Historically, areas which price risk-protection very cheaply have not turned out well for investors. Even Alan Greenspan in one of his last speeches warned investors about that. When he talked about risk he was very right. When the price of risk-protection is on the bargain table, it's time to watch out. The market loves to attack at a time when stock-holders are most confident and least prepared for trouble. Which is another way of saying that the situation is most dicey when investors are most convinced that all is well -- and when they feel most comfortable about ignoring risk.

The one thing that could totally upset all bullish scenarios would be a real estate collapse taking home prices below the mean. Regression to just the mean in real estate prices would be a modern disaster.


Blogger hemorrhoidforhousing said...

Smoking crack is disasterous too, but people do it anyway.

Greed has driven this market and greed begets gluttony which drives excess. Excess never ends well.

A regression to the mean will probably not happen quickly but the market will give back at least 15% over the next two years and stagnate for 3 more. This is how the mean will be found again.

Newtons law does not only apply to apples.....

9:13 AM  

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