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64 Better knowledge and forecasting of home-pricing trends could have prevented a great deal of damage caused by the subprime lending crisis. e $9 trillion mortgage industry operates with an approach to risk assessment that leads to avoidable financial losses, and sometimes to calamities for market participants and the entire economy. e current risk assessment approach puts great emphasis on loan-to-value (LTV) ratios-while putting little emphasis on the value direction of the houses. As a result, from the beginning of the housing crash to today, millions of mortgages with high LTVs have been funded on homes already declining in value or at high risk of declining. e origin of the current approach may have its roots in the historical faith that home prices always rise, or in the false assumption that houses are similar to more-liquid assets and therefore cannot be forecasted with sufficient reliability. e ability to forecast home prices arises from their relative illiquidity. Each house sits in a unique place and can be quite different from its neighboring houses, making transactions slower and more expensive than trading stocks. In addition, most homebuyers don't purchase due to investment-oriented perspectives; they purchase when it is the next step of their life goals. For these reasons, indications that prices should shift up or down, such as an interest rate change-do not instantly reflect in home prices. Prices adjust over time to such indications creating price trends that often persist for one to six years. Such trending makes it easier to forecast home price changes relative to more liquid assets like stocks, which rise and fall immediately to reflect available information. Because it is critical to accurately measure the price trend of a house for an accurate forecast, it is important to not erroneously assume that the average home price direction of the market applies equally to all houses within that market. If potential homebuyers are seeking a house that costs $250,000 in a particular town, they will not consider a $400,000 house in the same town. For this reason, demand for lower-cost homes will have little or no impact on the price of more expensive homes. Since home price changes within one town can vary significantly, the most accurate forecasts predict prices not at the market level, but at the house level to reflect market granularity. Unfortunately, media sources, market commentators, and numerous experts perpetuate the notion that home prices within a market always move in unison. Perhaps they do this because describing a market in its full complexity is difficult with but a single article or headline. But, regardless of reason, we see monthly reports about how the market is "recovering" and "rising," or sometimes "slowing." ese statements are often grossly D A T A & R E S E A R C H / A L L A N W E I S S UNDERSTANDING HOME VALUE TRENDS TO AVOID LOSSES