Publications

- Feburary 2010: Volume 22, Number 2

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Breaking Up: The Story Behind the Divorce of Real Estate and Capital Markets

by Claude Gruen

The real estate and financial market crashes of 2007 are the most recent empirical proof that imperfectly competitive markets do not trend toward equilibrium transactions of price and quantity. As businessman and currency speculator George Soros has pointed out frequently, “financial markets have a tendency to develop bubbles.” Real estate markets, too, will tend to overshoot and then undershoot equilibriums of price and sales volume.

But the distance between market and equilibrium values became very great as a result of the agreements that sealed the marriages between participants in real estate and capital markets in the decades before 2007. The capital participants in that marriage appeared to be respectable and wealthy, but they had skeletons in their closets. One skeleton, uncovered late into the marriage, was that many of the real estate loans packaged into the securities sold in capital markets were destined to fail. Another hidden secret was that very

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