[mresort]

Originally Posted by tony soprano

No real argument there. I wasn't suggesting the same percentages I used in my lemonade analogy correlated directly with housing. I'm not sure I'm following you here. Why would banks lose more money when they decrease supply? You're saying the banks are holding back inventory at the instruction of the government?

Look at the following pic.

In a free market, you should price your product at P1 which will give you the sale volume at Q1. This is the market equilibrium point. The market should go this way without any 3rd party intervention. However, the government wants to pop up the house price as too many people are upside down now. They want to set the price at P2 so that more people can escape from the foreclosure crisis. In order to do that, the banks need to shrink the supply by decreasing the inventory. Now the supply curve changes from S1 to S2. Note that higher price drives down the quantity demanded also (it is down from Q1 to Q2). You may also notice that the deman curve is pretty flat, which means the demand is pretty elastic. The percentage change in quantity demanded is much greater than the percentage change in the price. In other words, even the supply has been decreased siginifcantly, it only led to a very small price increase. Olecapt always asked how come the price doesn't increase much even though the supply is dropping rapidly. This is the answer.

In the past, when S1 was the supply, the revenue the banks got was P1 multipied by Q1. Now the supply changes to S2, so the revenue become P2 multipied by Q2. P1Q1 is actually much bigger than P2Q2, which implies the banks are earning less revenue than before. The only reason the banks want to sell at P2 is because the government wants to pop up the price. To decrease the supply, the government must try to delay the foreclosure process as much as possible. The banks agree to do that because they get free money from the federal government. Without the life support from Uncle Sammy, it is almost impossible for the bank to hold back such big amount of inventory.

Just my 2 cents. Please correct me if I am wrong.

[tony soprano]

Originally Posted by mresort

Look at the following pic.

In a free market, you should price your product at P1 which will give you the sale volume at Q1. This is the market equilibrium point. The market should go this way without any 3rd party intervention. However, the government wants to pop up the house price as too many people are upside down now. They want to set the price at P2 so that more people can escape from the foreclosure crisis. In order to do that, the banks need to shrink the supply by decreasing the inventory. Now the supply curve changes from S1 to S2. Note that higher price drives down the quantity demanded also (it is down from Q1 to Q2). You may also notice that the deman curve is pretty flat, which means the demand is pretty elastic. The percentage change in quantity demanded is much greater than the percentage change in the price. In other words, even the supply has been decreased siginifcantly, it only led to a very small price increase. Olecapt always asked how come the price doesn't increase much even though the supply is dropping rapidly. This is the answer.

mresort, you're saying that the demand for housing in Vegas right now is elastic. The degree of elasticity is up for debate, but the chart you posted illustrated exactly what I said in my lemonade analogy - when prices fall, volume increases. Or, to put it another way, to move further out on the demand curve, prices must fall. BTW, olecapt doesn't ask "why don't prices increase much even though the supply is dropping rapidly?" He's usually asking why have prices fallen while volume has increased, or how have prices fallen while inventory has been reduced. Oh, I know! The market must be manipulated!

In the past, when S1 was the supply, the revenue the banks got was P1 multipied by Q1. Now the supply changes to S2, so the revenue become P2 multipied by Q2. P1Q1 is actually much bigger than P2Q2, which implies the banks are earning less revenue than before. The only reason the banks want to sell at P2 is because the government wants to pop up the price. To decrease the supply, the government must try to delay the foreclosure process as much as possible. The banks agree to do that because they get free money from the federal government. Without the life support from Uncle Sammy, it is almost impossible for the bank to hold back such big amount of inventory.

Just my 2 cents. Please correct me if I am wrong.

Yes, I do agree with you that banks would not be able to hold back the inventory they have without assistance from the government; most notably the fact that they no longer have to follow mark-to-market accounting.

My other observation is that maximum revenue does not necessarily correspond with maximum net income. It is possible to price low enough to stimulate demand but you're losing money on every transaction. When you raise prices high enough to make a profit on each transaction, you'll see a fall off in gross revenue because of reduced demand, but you're no longer losing money on each transaction. The net result is that you're more profitable even though you have less gross revenue. Looking at the graph you provided - you could lower the price on the P-axis, which would move the equilibrium point further out on the demand curve, sufficiently enough to generate more revenue than P1Q1, yet still be less profitable than had you left prices higher.

[olecapt]

Here is the "demand" for REOs for the last year...




Just good old free market right?

And yes the slope is upward...

[007 license to sell]

Pay close attention to the stats are revealed in this article:
More than a year into the initiative, only about 4,000 local homeowners have qualified for permanent adjustments under the Home Affordable Modification Program, or HAMP. To get an idea of what this means is about 7,400 homeowners in Clark County received notices of default in February alone, according to ForeclosureRadar.com.

according to this article (Nevada home­owners have close to $25 billion in negative equity)This statement puts into perspective of how much the banks and investors will have to write down and h insight to how this can affect banks books. This may be one reason the banks haven't been so reticent to write down principals or respond to short sales and REO offers.
Federal aid program fails to help many

In Southern Nevada, an area known as ground zero of the nation's housing crisis, far fewer people than expected have received home loan modifications through a $75 billion stimulus program designed to reduce the impact of fore­closures on communities.

[tony soprano]

Originally Posted by olecapt

Here is the "demand" for REOs for the last year...

Just good old free market right?

And yes the slope is upward...

It's as plain as day...the housing market is being manipulated!! Lenders are intentionally crashing the market! Has anyone else identified this obvious manipulation? The WSJ? Forbes? Barron's? Anyone? Certainly this is newsworthy?!

[olecapt]

Originally Posted by tony soprano

It's as plain as day...the housing market is being manipulated!! Lenders are intentionally crashing the market! Has anyone else identified this obvious manipulation? The WSJ? Forbes? Barron's? Anyone? Certainly this is newsworthy?!

You should point it out to them. Maybe they will quote you.

And yes it is newsworthy regardless of the causals...

[olecapt]

Originally Posted by 007 license to sell

Pay close attention to the stats are revealed in this article:
More than a year into the initiative, only about 4,000 local homeowners have qualified for permanent adjustments under the Home Affordable Modification Program, or HAMP. To get an idea of what this means is about 7,400 homeowners in Clark County received notices of default in February alone, according to ForeclosureRadar.com.

according to this article (Nevada home*owners have close to $25 billion in negative equity)This statement puts into perspective of how much the banks and investors will have to write down and h insight to how this can affect banks books. This may be one reason the banks haven't been so reticent to write down principals or respond to short sales and REO offers.
Federal aid program fails to help many

In Southern Nevada, an area known as ground zero of the nation's housing crisis, far fewer people than expected have received home loan modifications through a $75 billion stimulus program designed to reduce the impact of fore*closures on communities.

I believe it has been quite clear since day one that none of these programs have any large effect in Las Vegas.

In general the conditions rule out virtually all the LV mortgage holders at risk.

For instance a peak years buyer who put 20% down would be eligible only if his home is worth more than 64% of its peak value. Given that virtually all the hard hit places are under 55% remaining value virtually no one will qualify.

Anyone with less than 20% down is of course in worse trouble.

[tony soprano]

Originally Posted by olecapt

You should point it out to them. Maybe they will quote you.

And yes it is newsworthy regardless of the causals...

It's only newsworthy to the people that actually believe it. Which means it's about as newsworthy as the Grass Knoll theory and Area 51.

[olecapt]

Originally Posted by tony soprano

It's only newsworthy to the people that actually believe it. Which means it's about as newsworthy as the Grass Knoll theory and Area 51.

The data is the data...And it is interesting enough in its on right.

You got some straightforward explanation for a flat or inverted demand curve?

[tony soprano]

Originally Posted by olecapt

The data is the data...And it is interesting enough in its on right.

Perhaps to the budding conspiracy theorist.

You got some straightforward explanation for a flat or inverted demand curve?

Your chart ignores supply so it's of little value in determining market equilibrium. This chart is the basis of your market manipulation thesis?