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EconProf
6 years ago

Thanks Rich for your
Thanks Rich for your revealing graphs and insightful commentary.
I agree that we are not yet in a true bubble, in that the signs of mania are not there. However, we need not reach that peak in order for prices to fall.
The previous two peaks, roughly in 1980 and 1990, were lower that the current level, as your graph shows. Those price declines were triggered by recessions. Since no recession is on the horizon, prices will probably keep climbing, at lease for now.

Escoguy
6 years ago
Reply to  EconProf

I tried leasing now but it
I tried leasing now but it was too expensive.

bewildering
6 years ago
Reply to  EconProf

EconProf wrote:Thanks Rich
[quote=EconProf]Thanks Rich for your revealing graphs and insightful commentary.
I agree that we are not yet in a true bubble, in that the signs of mania are not there. However, we need not reach that peak in order for prices to fall.
The previous two peaks, roughly in 1980 and 1990, were lower that the current level, as your graph shows. Those price declines were triggered by recessions. Since no recession is on the horizon, prices will probably keep climbing, at lease for now.[/quote]

I do not think prices in 1980 declined in nominal terms? House price inflation just did not keep up with general inflation.

Perhaps Rich can confirm.

EconProf
6 years ago
Reply to  bewildering

Good point, since inflation
Good point, since inflation in 1979, ’80, and ’81 averaged 11.7%. Rich, what is the verdict?

spdrun
6 years ago
Reply to  Rich Toscano

80s vs today. Home prices
80s vs today. Home prices actually tracked inflation well in the 80s, vs now…

bewildering
6 years ago
Reply to  spdrun

spdrun wrote:80s vs today.
[quote=spdrun]80s vs today. Home prices actually tracked inflation well in the 80s, vs now…

[/quote]

I am very confused by this chart. The Case Shiller data does not look like the historical data from Shiller’s website

http://www.econ.yale.edu/~shiller/data.htm Click on “US Home Prices 1890-Present.”

spdrun
6 years ago
Reply to  bewildering

Mine is nominal vs inflation.
Mine is nominal vs inflation. His is inflation-adjusted over time.

gzz
gzz
6 years ago

Agree with most of the
Agree with most of the article, except I don’t think rates are unusually low. Japan is now at year 26 or so of near-zero rates. Our rates are nearly the highest in the first world.

gzz
gzz
6 years ago
Reply to  Rich Toscano

Rich, the US economy, with
Rich, the US economy, with year after year of sub-2% inflation and stagnant working-age population, looks a lot more like Japan of 1992 (before 25 years and counting of near or below 0% rates) than the USA of 1970-1980 (high inflation and rapidly growing workforce).

justme
6 years ago

I have not read Piggington
I have not read Piggington much lately, but it surprises me that Rich Toscano does not see a bubble at today’s valuations.

I’m not at all convinced that the valuation index predicts with any certainty what constitutes a bubble. A bubble is defined also by its high sensitivity to shocks and sentiments, not just by some simplified ratio of price/ave(rent+income). There are many kinds of shocks to consider, to interest, to income, to equity, indeed to price itself, to rents, to outlook, to stocks, to non-local housing markets, to lending, to liquidity, and probably more that I did not think of right now.

Note to self: valuation indices based on income-only and rent-only are here:

https://piggington.com/valuation_update_bonus_graphs

gzz
gzz
6 years ago

It is a bubble if people are
It is a bubble if people are buying only with the hope to sell it later to a greater fool.

Right now, however, prices are actually quite low compared to rents for both investors and primary home buyers.

spdrun
6 years ago
Reply to  gzz

gzz – it’s a bubble if people
gzz – it’s a bubble if people are holding with the hope of massively increased prices. Also, no one knows if rents are rationally valued.

gzz
gzz
6 years ago
Reply to  Rich Toscano

Rich Toscano wrote:spdrun
[quote=Rich Toscano][quote=spdrun] Also, no one knows if rents are rationally valued.[/quote]

Why would they not be? It’s a market set solely by supply and demand (unlike home purchases, which also has the speculative factor of anticipated future price changes).[/quote]

I agree, a rent bubble makes as much sense as a bubble in the price of a haircut. There is no speculative element when people rent a house.*

I think what he really means is more “The San Diego economy will fall into the crapper soon, so rents will fall and so will housing prices.”

*Exception for cities with rent control rights. If you think rents will go way up in SF/NYC, you might rent something bigger than you want now to lock in the price for the future or speculate on future landlord buy-out payment.

spdrun
6 years ago
Reply to  gzz

Take it in context. Let’s say
Take it in context. Let’s say rents have been increasing 10% per annum. Landlords come to expect 10% more every years. Suddenly, they end up asking 10-20% more than the market can handle for a longer duration. Tenants are forced into debt for other things in order to make their rent. That debt has to be repaid, reducing their FUTURE ability to pay.

Escoguy
6 years ago
Reply to  spdrun

Or you just get higher
Or you just get higher earning people moving here.

Or the people who live here figure out how to earn more.

I have good examples for both and they are eye opening.

Renters are not always screwed. Some have high paying jobs and a lot of flexibility in managing their careers or own companies.