ipoplaya said:
Interesting read on the NOD/price correlation:
http://www.californiahousingforecast.com/commentary/2007/4/7/nods-dont-affect-prices.html
I remember that thread. I commented on it:
I think you are completely wrong with your cause and effect analysis in this post.
First, the initial price drop in a speculative bubble is caused by buyer exhaustion - there are simply no buyers left to buy. Volume drops way off and prices begin to fall. This is the beginning causal event.
Second, the initial price drop is putting pressure on overextended homebuyers who purchased with suicide loan terms. It is the loan terms and payments when coupled with the initial price drops that causes the NOD's and REO's to rise.
Third, and this is where you miss Rich's point, once the downward spiral gets going, the REOs do drive prices lower. this in turn creates more REOs which drive prices even lower until we reach the bottom. You have identified half of the feedback loop without acknowledging the other half.
You are correct that REOs are lagging, so it is of little value as a forecasting tool; however, since NOD's lead to REOs, NODs are a great forecasting tool.
You have identified one of the two conditions (lower prices causing NODs) which starts the process in motion. You have failed to identify the cause of the initial price declines (buyer exhaustion), and you have failed to recognize the chain of events is part of a feedback loop which includes REOs driving prices lower. In short, you have not debunked anything relative to the importance of REOs in the uncoming price declines.
Further, "I wonder how Rich Toscano drew the conclusion that rising NODs are must-sell inventory which in turn means sellers with lower prices." He makes no such claim. He merely points out that NODs lead REOs which are, in fact, must-sell inventory; therefore, the ratio of NODs to inventory are a good leading indicator, not because of their direct causal relationship, but because they accurately forecast the REO to total inventory relationship which is the causal relationship driving prices lower.
