Wednesday, September 5, 2007

The Physics of Home Mortgage Debt

I previously posted here that it looked to me like Home Mortgage Debt had turned parabolic. I then posted here that I felt that trend was changing.

So, just for the sake of argument, let's see what happens if we apply a bit of physics to the "problem".

Let's call the current home mortgage debt the position.

Let's call the change in that position in one quarter the average velocity (in that quarter).

Let's call the change in that velocity in one quarter the average acceleration (in that quarter).

Why might we want to do that? If we know the acceleration, we also know the force. They are directly proportional to one another.

At a gut level, we already kind of know the force. It is in all the headlines. The housing bubble may be popping and prices may be coming back down to earth (much like a baseball when tossed into the air). If true, wouldn't it be nice to actually see its effects?



The velocity clearly shows that although we're still moving forward, we are starting to slow down. That's not especially bad news. It isn't the end of the world just because something slows down.



The acceleration shows why we are slowing down. There is a force being applied. The Fed is "hitting the brakes". It is more than that though. The acceleration appears to be growing worse. A better analogy might be that the driver of our car isn't just pressing down on the brake pedal. He's also got the car in reverse and is increasingly pressing down harder on the gas.

Why would he do that? He might not notice what he's doing or he simply might not have a choice. Maybe he sees something in the road that bothers him, like an oncoming truck (i.e. inflationary pressures due to rising oil prices perhaps).

11 comments:

a d said...

i'm a little bit hazy on it but rather than subtracting one quarter from another, i think it's more accurate to say that acceleration is the derivative of the curve or the rate of change

Stagflationary Mark said...

Hi mappatazee,

I made a couple of errors in my wording I see. I assumed that time was held constant but did not include that in my discussion. Oops.

Further, I was calculating the average velocity and the average acceleration and should have pointed that out too.

I stand by the math. I know it is correct. If it isn't, they'll want my physics degree back, lol. ;)

I have therefore fixed the article to be more clear.

Thank you for your input.

Stagflationary Mark said...

I hope I made it more clear. It took more work than I thought and I'm still not sure I'm happy with the wording. Clearly I need to get more sleep, lol. ;)

Anonymous said...

Where's the mass?

A better way to think about it is the inventory equation, IMO.

Stagflationary Mark said...

anon,

True, if there is a force there has to be a mass for it to act on.

I was tempted to go down the path of "acceleration due to _____" (insert a gravity-like term) and leave force completely out of it.

Predicting future results by looking at past data (such as I have done here) is always questionable at best. I'm primarily just saying that if it is left to its own, it might soon get ugly.

Rob Dawg said...

Reversion to mean is an attractor.

Stagflationary Mark said...

Rob Dawg,

Is the force like a spring? Is the force stronger the further you get from the mean?

Or does the mean act more like the sun? Is the force weaker the further you get from it?

If it is the former, we're in some seriously deep trouble. D'oh! ;)

Rob Dawg said...

It is indeed a spring. Actually, I coined the term "Slinky Effect" to describe the behavior.

Think of a slinky with 5 balls attached representing the 4 quartiles of the market (Yes, 5, one on each end and 3 distributed in the middle. Pull on the low end with defaults and REOs and watch the behavior. Notice how at first the meadian ball doesn't move. Especially if it is still stretching from all the past pushing that the run up caused.

The truth is certainly more complex, the best physical model is probably a car's suspension system. The spring rate is not linear, there are stops and there are response discontinuities and there is slop. We've hit a pothole at high speed and the wheel is taking time to respond. Sorry, the engineer in me sometimes gets loose. Cary on. I can explain the "spring" some more if you are interested.

Stagflationary Mark said...

Rob Dawg,

I love your slinky analogy but I was very much hoping you'd pick gravitation, lol. The housing market needs all the help it can get right now. However, you have inspired me to think outside the box. I now see a government plan that can get us out of this!

The Plan

1. At a cost of $300 billion, upgrade the five balls. They should be 1,000 times larger and made of solid iron. Why iron? In addition to iron's superior inertial qualities, iron has another desirable quality which will become quite apparent in step #3 of this plan.
2. Immerse the entire slinky contraption in 30.4 billion barrels of this. This will add additional stickiness to home prices. If 30.4 billion barrels aren't immediately available for delivery, we'll just have to invade a foreign country to get it.
3. Borrow an additional $5 trillion to research and develop the largest one of these that man has ever seen. Not only would it give the Fed one more tool to fight deflation, but it will help answer the 'Big Questions' (conundrums).

Lab Rat said...

You guys made me choke on my coffee. Good work!

Stagflationary Mark said...

lab rat,

That's just your body attempting to reject the experimental substance. This is all perfectly normal. Just keep drinking it and before you know it you'll have the intelligence of not one, but two Nobel prize winning economists!