Answer & Explanation:A Random Walk Down Walk Street discusses a number of different bubbles, including the Tulip Bulb craze, the South Sea Bubble and the 1983 Tech IPO craze. Newport Beach, San Francisco and Palo Alto residential home prices have hit record highs. Are these at “bubble” prices or not? Explain your rationale in two pages. If there is a bubble, what do you think will cause the party to end?Hint:1. You may want to examine the work of Robert Shiller, including the Case-Shiller Home Price Index. 2. Do you think that the ability for home buyers to borrow at cheap interest rates affects home prices? Remember the two metrics which lenders use to make a home loan? Loan to value and debt service coverage ration. How would an increase in borrowing costs impact the debt service coverage ratio of a home buyer? 3. What other factors restrict supply of home inventory in the Bay Area? (i.e. restrictive land use policies). 4. Is there a correlative bubble of stock prices for publicly-traded Bay Area stocks which are driving up Bay Area home prices?5. What is the impact of foreign, all-cash buyers in the Bay Area real estate single family residential market? 6. Do you think that institutional buyers coming in to the single family residential home ownership market is having an impact? (i.e., Blackstone, American Homes 4 Rent, Waypoint (converting sfr home inventory from private equity to Starwood Waypoint Residential Trust, a REIT, etc.)7. Do you think that a serious earthquake in the Bay Area could impact home prices? What percentage of single family homes are covered by earthquake insurance? If FEMA stepped in, what kind of assistance would it offer?
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