Overvaluation causes bubbles. What is sufficient to stop that?

2 posts / 0 new
Last post
kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Overvaluation causes bubbles. What is sufficient to stop that?

Economic bubbles have happened with or without a Gold Standard.

Economic bubbles have happened with or without a central bank.

Economic bubbles have happened with or without an open trade policy.

Economic bubbles have happened with or without a system of digital credit.

This leads me to one other place to look: Are economic bubbles created simply due to overvaluation?

I say, yes they are!

So what is the minimum level of activity that can cause overvaluation? Simple. Just overvalue something.

So lets see, we a bunch of people claiming that their financial innovations reduce risk. The Federal Reserve claims it can reduce risk. Then there have been companies like AIG and Enron who wanted us to believe that their activities generally reduced risk. Are they telling the truth? How can I believe that they reduce risk by making it easier to overvalue something? To think that they reduce risk is as easy as believing that credit cards reduce risk for businesses. Inflation is the good friend of financial companies like Countrywide Financial, Goldman Sachs, and Bear Stearns. Inflation is also the friend of overvaluation. In fact, if the government can cover their losses, financial institutions would like to invest in insolvent creditors who would otherwise not be worthy of their credit.

Now here is an idea you likely never heard of before. You can have a system where the price of an item goes down with time while the per month value can go up. How can that be so? Let's take a simple formula:

value of home in market X = (months remaining until April 2040)*(per month value in market X)

So let's say you are house flipper. It is April 2010, and you buy a house for $360,000. You fix it up so now it is worth $432,000. You decide that you can:

1) Sell it for $480,000.
2) Rent it out for $1,200 per month.

So let's say you chose plan 2, and you rent it out for $1,200 for the next 10 months. The official rent, the one actually determined by the customer, sets the actual price of the home. The rent is fixed on a per customer basis. There is no variable rent so as long as it is the same customer. The customers moves away. Then you decide you should sell it, and the price after 10 months is $420,000 ($12,000 down from originally). Another house flipper waited until February 2011 (i.e. 10 months later) to buy your house. Per the original customer rental payments, you market the house at $1,200/month for the remaining 350 months. The other house flipper is required to pay accordingly. So the house flipper buys the house for $1,200/month * 350 months, or $420,000. 5 months later, the house flipper rents out the property at $1,300 per month until April 2030. In April 2030, a newlywed couple is thinking about flipping a used house for a steady stream of income. So they purchase the house for $1,300/month * 120 months (or $156,000). And after some quick modifications, they are able to rent it out for $1,400/month for the remaining 119 months, resulting in an non-discounted income $11,900.

This method basically sets a method of depreciating the value of a home while actually increasing attractiveness of improving the value of a home. You see in the example above that each house flipper pays less and less for acquiring the right to rent out the house, yet each time, the house flipper still was able to earn a profit. Now if you put these houses on the market for sometime, this will put downward pressure on the value of new homes (due to competition with the sales of older homes), and this helps to prevent their overvaluation. Now not only is it easier to buy a used home with a larger down payment, situations like one finds in over-priced California communities can be avoided. With this mathematical enterprise, you no longer have failures like Fannie Mae and Freddie Mac running the global economy into the ground, and house flippers can enjoy flipping houses some more without driving prices through the roof. This method could be applied to any kind of real estate. It can also be applied to enterprises themselves.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Overvaluation causes bubbles. What is sufficient to ...
kmarinas86 wrote:

Economic bubbles have happened with or without a Gold Standard.

Economic bubbles have happened with or without a central bank.

Economic bubbles have happened with or without an open trade policy.

Economic bubbles have happened with or without a system of digital credit.

This leads me to one other place to look: Are economic bubbles created simply due to overvaluation?

I say, yes they are!

So what is the minimum level of activity that can cause overvaluation? Simple. Just overvalue something.

So lets see, we a bunch of people

So lets see, we have a bunch of people....

kmarinas86 wrote:

claiming that their financial innovations reduce risk. The Federal Reserve claims it can reduce risk. Then there have been companies like AIG and Enron who wanted us to believe that their activities generally reduced risk. Are they telling the truth? How can I believe that they reduce risk by making it easier to overvalue something? To think that they reduce risk is as easy as believing that credit cards reduce risk for businesses. Inflation is the good friend of financial companies like Countrywide Financial, Goldman Sachs, and Bear Stearns. Inflation is also the friend of overvaluation. In fact, if the government can cover their losses, financial institutions would like to invest in insolvent creditors who would otherwise not be worthy of their credit.

Now here is an idea you likely never heard of before. You can have a system where the price of an item goes down with time while the per month value can go up. How can that be so? Let's take a simple formula:

value of home in market X = (months remaining until April 2040)*(per month value in market X)

So let's say you are house flipper. It is April 2010, and you buy a house for $360,000. You fix it up so now it is worth $432,000. You decide that you can:

1) Sell it for $480,000.
2) Rent it out for $1,200 per month.

So let's say you chose plan 2, and you rent it out

So let's say you chose plan 2, and you rent out the house....

kmarinas86 wrote:

for $1,200 for the next 10 months. The official rent, the one actually determined by the customer, sets the actual price of the home. The rent is fixed on a per customer basis. There is no variable rent so as long as it is the same customer. The customers moves away. Then you decide you should sell it, and the price after 10 months is $420,000 ($12,000 down from originally). Another house flipper waited until February 2011 (i.e. 10 months later) to buy your house. Per the original customer rental payments, you market the house at $1,200/month for the remaining 350 months. The other house flipper is required to pay accordingly. So the house flipper buys the house for $1,200/month * 350 months, or $420,000. 5 months later, the house flipper rents out the property at $1,300 per month until April 2030. In April 2030, a newlywed couple is thinking about flipping a used house for a steady stream of income. So they purchase the house for $1,300/month * 120 months (or $156,000). And after some quick modifications, they are able to rent it out for $1,400/month for the remaining 119 months, resulting in an non-discounted income $11,900.

So they purchase the house for $1,300/month * 120 months (or $156,000). And after some quick modifications, they are able to rent it out for $1,400/month for the remaining 119 months, resulting in an non-discounted income $1,400/month*119 months - $156,000 = $10,600.

kmarinas86 wrote:

This method basically sets a method of depreciating the value of a home while actually increasing attractiveness of improving the value of a home. You see in the example above that each house flipper pays less and less for acquiring the right to rent out the house, yet each time, the house flipper still was able to earn a profit. Now if you put these houses on the market for sometime, this will put downward pressure on the value of new homes (due to competition with the sales of older homes), and this helps to prevent their overvaluation. Now not only is it easier to buy a used home with a larger down payment, situations like one finds in over-priced California communities can be avoided. With this mathematical enterprise, you no longer have failures like Fannie Mae and Freddie Mac running the global economy into the ground, and house flippers can enjoy flipping houses some more without driving prices through the roof. This method could be applied to any kind of real estate. It can also be applied to enterprises themselves.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments