Pyramid Scheme Again...

Thanks to Ben at the Housing Bubble Blog for this bit on the OFHEO report.


OFHEO site's (PDF file)

“An important factor that has affected the HPI in some recent quarters is the influence of refinancings on the overall index. Valuations derived from refinance appraisals are constructed under different circumstances than those surrounding purchase prices; appraisers operate under specific types of pressures and may employ different ‘comparable’ properties in estimating value than were (implicitly) used in the formation of a purchase price.”

“Similarly, appraisals conducted for ‘rate-term’ refinances can in fact look different from appraisals for ‘cash-out’ refinances. In areas where the cash-out refinancing has grown the most, the divergence between the HPI appreciation rate and the purchase-only rate is the greatest.”

“In conclusion, the empirical evidence suggests that the growing prevalence of cash-out refinances over the last year has had the effect of increasing measured appreciation rates for the HPI. Homes with cash-out refinances likely are disproportionately those that have experienced the most appreciation. Thus the HPI dataset, which includes appraisals used for cash-out refinances, may have relatively more rapidly appreciating houses than the purchase-only index.”

Even the OFHEO knows this market is a giant pyramid scheme. Home appreciations were not due to value increasing... it was due to DEBT increasing as home debtors used their houses like ATM machines and credit cards. The scheme allows them to spend their house and the next fool comes along and buys the debt. Those people are called the greater fools... or bag holders. Apparently there was a pretty good supply of them too. How loud do you think these guys will scream when the fecal matter hits the fan?