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Rule Change Stabilizes Housing Prices?


Aid for banks could slow rate of negative change.

Professor Udall,

I live in the Los Angeles area, and I still think housing is overpriced out here.
Forbes recently said LA was the worst place to buy a home in 2009 - estimating another 25% decrease this year. Case/Shiller predicts a similar downward slope in California real estate for the next couple of years.

The only reason I see for an increase in home prices is hyper-inflation - which, after reading many articles in the Ville, seems like it won't hit until at least 2010.

Why are you bullish on California real estate?


Dear Jason,

I'm not bullish on California real estate, per se. I'm bullish on the finance stocks with exposure to it (see banks like Wells Fargo (WFC) or Bank of America (BAC)), given the relaxation of FAS 157 rule. As far as Forbes or Case-Shiller, they'll likely not say it's "smart" to buy real estate in California until the prices have risen materially.

I'm no expert on the California real-estate market, but I know that it's a much better buy today than it's been since maybe the late 1990s. Bottoms are always hard to call, but at a minimum, I believe we'll see the rate of negative change ease materially.

Secondly, the FASB rule may also provide a second derivative effect in helping housing prices stabilize, as now the banks won't be forced to mark the assets down, and likewise be forced to liquidate those properties so quickly in the foreclosure market.

Bottom line, the banks don't really need housing prices to rise a whole lot; they just need them to quit falling so rapidly. I'm not a huge believer in the hyper-inflation case, as some other Professors here are. I can see the potential path to it, but I view that scenario as remote.

Good luck!

Professor Udall
No positions in stocks mentioned.

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