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Buffer Bear

The Marginal Homebuyer

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By Gary North


Modern economic theory rests on the insight that what takes place between a buyer and a seller at the margin – one of these in exchange for two of that – is the central economic fact of pricing. The price of some item at the margin is imputed to all other goods of the same class.

Every mania is therefore an imputed-price mania. It cannot be sustained beyond the ability and willingness of the last marginal buyer to pay an equity-raising price to the last marginal seller.

At the tail end of any asset bubble, people who have watched the bubble grow from its inception kick themselves for having missed out. While it may be true that for them, they stayed on the sidelines too long in a truly once-in-a-lifetime opportunity, they don’t shrug it off and say, "Lots of other people missed out, too. So what? Something else will come along." Instead, they climb aboard on what they think is the last train out.
In manias, a few people buy in at the top. They buy an asset that will fall like a stone from astronomical levels. People who would not normally have been willing to roll the dice on such a high-risk venture buy in and gratefully sign the mortgage papers. Normally, no lender would have loaned to them. But the mania affects lenders, too. Both participants make a once-in-a-lifetime contract. Both will pay a heavy price when the mania ends. It is a once-in-a-lifetime opportunity to lose money.
Every mania ends when the last remaining group of potential buyers is finally unable to afford to buy. Then the market turns down.

The people who were the last ones to buy are left holding the bag. They committed themselves to huge monthly payments. They bought in at no money down or close to it. A month later, they are owners of a depreciating asset that may be worth 20% less after the sales commission than the day they bought it. But they owe full sticker price to the mortgage company.


There is nothing wrong with renting. It is wiser to buy with a fixed-rate loan than an ARM. It is wiser to buy where rental income will pay for mortgage/taxes/upkeep. But there is nothing wrong with renting. In a mania, it is the wise thing to do.

Edited by Buffer Bear

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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