Here Lies the American Dream

[uncomfortably numb]

Although I am no real estate expert, I do follow basic economics. In general, it seems as if there is a lack of understanding when it comes to prices and values. For any commodity, and let’s use real estate as an example, its real value (use value) is defined by its function. A 4br/2.5b house serves a particular purpose. The market, at any given time, places a price on that property by converting its use value into a monetary value, in our case in US$. From that time on, taking in to account depreciation, changes in location desirability (assuming constant use value and reasonably stable wages), the price of the property is completely a function of the value of the currency. This is the nature of the crisis we currently confront.

Here, there are two enormous forces at play which will determine where real estate will settle out. Interestingly, they are, at the moment, opposing forces. The first is the money supply; the second is the money supply, disguised as debt. One is an absolute change in value, the other a relative change.

The insane increase we have seen in the money supply (absolute change) is what has caused housing inflation. Classically, more $’s chasing after the same amount of goods/services causes the same commodity with the same exact use value to have a larger money value, therefore, higher prices for our property. This was facilitated by banks (central and otherwise) willing to lend (increase the money supply) absurd amounts for real estate.

The same process of increasing the money supply has also allowed the U.S. to increase its debt, both publicly and privately, to the point where our money (the US$) becomes worth less and less as compared with other currencies and commodities, such as gold, oil, etc. (relative change). So, although you might have made a paper gain of say x% due to inflation (increasing the absolute supply of dollars), you probably will have lost y% due to the same process (relative loss of the US$’s value as compared with any other ‘valued’ currency or commodity). And, of course, your paper gain is really no gain at all (unless your real estate is for investment purposes only, which is why the investment community, in general, absolutely loves asset inflation).

So, the same process (of devaluing our currency, in absolute and relative terms) is causing the average American to become poorer, really quickly. Unfortunately, the dollar’s tombstone is already in place at the Forest Lawn of dead currencies. I believe it reads, “Here Lies the American Dream.”

[sdduuuude]

I don’t completely disagree with your comments on inflation and money supply, buy your basic economics needs some work.

I believe this is an incorrect statement:

“For any commodity … its real value (use value) is defined by its function”

This is not its “real value.” That is its “value in use”
Each individual has a different value in use for each commodity.

A commodity’s value in use is defined by its function, but its real value is the highest price someone is willing to pay at a given instant in time. Period.

I also disagree with this:
“From that time on, taking in to account depreciation, changes in location desirability (assuming constant use value and reasonably stable wages), the price of the property is completely a function of the value of the currency.”

It may also be a function of the availability of capital – related to, but not the same as “value of the currency.”

Also, we can see an example of how value in use is not the “real value”. A commodity may have a constant value in use, and currency may have the same value, but if nobody can borrow the money to buy it, the price they are willing to pay can go down. Thus, the value of the commodity goes down.

I think the housing increase has not been entirely a result of currency devaluation, but a mis-valuation of mortgage debt instruments by Wall Street that has let to rampant lending of money that should never have been lent.

[sdduuuude]

I don’t completely disagree with your comments on inflation and money supply, buy your basic economics needs some work.

I believe this is an incorrect statement:

“For any commodity … its real value (use value) is defined by its function”

This is not its “real value.” That is its “value in use”
Each individual has a different value in use for each commodity.

A commodity’s value in use is defined by its function, but its real value is the highest price someone is willing to pay at a given instant in time. Period.

I also disagree with this:
“From that time on, taking in to account depreciation, changes in location desirability (assuming constant use value and reasonably stable wages), the price of the property is completely a function of the value of the currency.”

It may also be a function of the availability of capital – related to, but not the same as “value of the currency.”

Also, we can see an example of how value in use is not the “real value”. A commodity may have a constant value in use, and currency may have the same value, but if nobody can borrow the money to buy it, the price they are willing to pay can go down. Thus, the value of the commodity goes down.

I think the housing increase has not been entirely a result of currency devaluation, but a mis-valuation of mortgage debt instruments by Wall Street that has let to rampant lending of money that should never have been lent.

[uncomfortably numb]

By “real value” I meant real value. You are speaking of prices. The availability of capital is a function of the relative value of the currency, albeit indirectly. As capital becomes more available, it’s value decreases, just like everything else. If nobody can borrow money, it has a much greater value. Think about it.

[uncomfortably numb]

By “real value” I meant real value. You are speaking of prices. The availability of capital is a function of the relative value of the currency, albeit indirectly. As capital becomes more available, it’s value decreases, just like everything else. If nobody can borrow money, it has a much greater value. Think about it.

[sdduuuude]

Why, then, have rents increased little-by-little while house prices have soared ?

Both are priced in dollars.
Both are tied to the value in use.

If the dollar devalued so significantly as to triple the price of my house in the last 8 years, then surely the price of rent should have tripled as well.

But they didn’t.

[sdduuuude]

Why, then, have rents increased little-by-little while house prices have soared ?

Both are priced in dollars.
Both are tied to the value in use.

If the dollar devalued so significantly as to triple the price of my house in the last 8 years, then surely the price of rent should have tripled as well.

But they didn’t.

[The-Shoveler]

sdduuuude

Eventually rents and cost to buy converge,

That’s why we have a lot of inflation in the pipe that the Fed does not want you to think about,

Before 1980 the cost to buy was part of the Fed’s CPI,
Now it was replaced by owner equivalent rent.

If rents do not rise or cost of buying a home does not come down —- No one will ever build an appartment for renting ever again…. Think about it a few minutes, it will soak in.

[The-Shoveler]

sdduuuude

Eventually rents and cost to buy converge,

That’s why we have a lot of inflation in the pipe that the Fed does not want you to think about,

Before 1980 the cost to buy was part of the Fed’s CPI,
Now it was replaced by owner equivalent rent.

If rents do not rise or cost of buying a home does not come down —- No one will ever build an appartment for renting ever again…. Think about it a few minutes, it will soak in.

[sdduuuude]

I understand, but to say that inflation has been the exclusive cause of housing price increases when rents have not moved is incorrect.

[sdduuuude]

I understand, but to say that inflation has been the exclusive cause of housing price increases when rents have not moved is incorrect.

[blahblahblah]

The excess capital created by the E-Z credit boom and the MBS market could only be used to purchase one asset class (houses), and to a much smaller extent house-related goods (landscaping, granite countertops, etc…) and consumer goods via equity loans. That’s why house prices went up so much while rents increased only slightly. Had the fed simply printed more bills, all asset classes would have risen.

[blahblahblah]

The excess capital created by the E-Z credit boom and the MBS market could only be used to purchase one asset class (houses), and to a much smaller extent house-related goods (landscaping, granite countertops, etc…) and consumer goods via equity loans. That’s why house prices went up so much while rents increased only slightly. Had the fed simply printed more bills, all asset classes would have risen.

[The-Shoveler]

sdduuuude

Think health insurance, most Stuff that can’t be outsourced or done by undocumented workers. then you will see the inflation.

Also compair to other currencies, Australian dollar, Canada currency, euro etc ….

[The-Shoveler]

sdduuuude

Think health insurance, most Stuff that can’t be outsourced or done by undocumented workers. then you will see the inflation.

Also compair to other currencies, Australian dollar, Canada currency, euro etc ….

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