Software & Finance - Monthly Magazine Online

Volume 2 - Issue 10

October 2012

Economics - Fix Housing Crisis with Balloon Strategy


Have fun on fixing the housing bubble created during 2006. Consider you have couple of baloons given below:

 

1. Home price

2. Inflation

3. US Dollar

4. God and other precious metals

5. Oil Prices

6. Commodities

7. Salary

 

The above things should have a balance in real life otherwise it would be a big problem for everyone. Assume that every item is a balloon of same size when we start with.

 

Now consider the follwoing scenario.

 

Year ONE:

1. Home prices increased by 25% in one year, it is a very big balloon now.

2. Gold and other Commodities increased by 5%

3. Overall Inflation increased by 2.5%

4. Salary increased by 2.5%, it is a very small balloon now.

 

Now there is a significant mismatch. There are two ways to fix this. Either burst the home prices or increase the size of the balloon for other to match with the first one.

 

Fixing the Problem - Method1 - Very Fast and Clean Method

Year TWO

1. In year two, home prices drops by 20% to 5%

2. Gold and other Commodities stay the same at 5%

3. Overall Inflation increased by abother 2.5% to 5%

4. Salary increased by abother 2.5% to 5%

 

Fixing problems - Method 2 - Slow but Most Liked Approach

Year TWO:

1. Home prices drops by 5% to 20%

2. Gold and other Commodities increases by another 5% to 10%

3. Overall Inflation increased by abother 7.5% to 12.5%

4. Salary increased by abother 5% to 10%

 

Year THREE:

1. Home prices drops by 5% to 15%

2. Gold and other Commodities increases by another 5% to 15%

3. Overall Inflation increased by abother 5% to 15%

4. Salary increased by abother 3% to 13%

 

Year FOUR:

1. Home prices drops by 5% to 10%

2. Gold and other Commodities drops 5% to 10%

3. Overall Inflation increased by abother 5% to 20%

4. Salary increased by abother 2% to 15%

 

Year FIVE: - Home prices are undervalued now...! Problem fixed.

1. Home prices increases 8% to 18%

2. Gold and other Commodities drops 8% to 18%

3. Overall Inflation controlled by 2% to 18%

4. Salary increased by abother 3% to 18%

 

Both methods discussed above will fix the problem. But people like the second approach the most eventhough it would affect lower middle class people!