Seems like things have been slow

[renterclint]

Is class in session? Very good, clear explanations of the impact of inflation on the value of assets. But one of the points made was regarding impact of inflation on near-term affordability.

Back to Burger King…

If you make $1 day, and a Whopper is $1.85. You’re not having a burger today. Five years later, BK still sells the Whopper for $1.85. Inflation was 3% during that five years, so in real terms the dollar is now $1.56.

Now let’s say that your wage grew 5% annually during the 5 yrs (a fairly typical annual wage increase), now your making $1.22.

You still aren’t buying a burger!

$1 per day wage may sound ridiculous, but we aren’t really talking about burgers. Median income in SD is about $62k and median home is 9x that!

Who wants to lend me some $$ for a burger? Fixed rate only please…

[Bugs]

The other thing about locking housing prices in with the rate of inflation is that the tracking occurs over the long term, not from one of the high or low points. I think it would be a huge mistake to think of our current position as being just another point in that long term trend.

If you want to go back 20 years and track inflation as an overall trend you’ll see that it will indeed take a 50+% hit off peak housing prices to align them with the long term inflation trend.

[Anonymous]

FSD, I agree with you, that Rich very nicely illustrated how San Diego home prices went down over ’90-’97 as mortgage rates went down.

But, for the U.S. as a whole, over ’90-’97, while mortgage rates went down, as Rich illustrated, the OFHEO index for the U.S. went up, from 170 to 206.

http://www.ofheo.gov/media/pdf/3q06hpi.pdf, pages 48 and 49 of the pdf.

I stand by my statement that when inflation and interest rates are high, asset prices are low. You say short-term; I say as long as inflation and interest rates are high, which may be a short time, or long time.

[PerryChase]

Very astute point, jg. What you say makes perfect sense to me. If interest rates and inflation are high, then households are more likely to put their money into savings accounts.

[Anonymous]

…or not be able to afford to borrow to buy an asset, whether the asset is a house or a share of stock or a business.

[(former)FormerSanDiegan]

jg –

OFHEO prices went up from 1968 to 1975, 1975-1982, 1982-1999 and any other 7-year period I can find. So, it’s no surprise that as a whole US prices went up in 1990-1997 as rates went down.

I agree that rates do impact prices. However, higher inflation (which accompany higher rates) also impacts prices.

Here is a chart showing OFHEO home prices (1975=100) from the mid 1970’s until 2000 (when the current bubble started IMO).

It turns out that the rate of home price increases during the period 1975 through 1990 (a period of generally higher rates, green box) was higher than 1990-1997 (a period of lower rates, gold box).

Rate changes do change the slope of the increases and decreases inversely as you state. However, history seems to show that during prolonged periods of higher rates, home price increases are higher, than during prolonged periods of lower rates.

[img_assist|nid=2487|title=Prices and Rates|desc=|link=node|align=left|width=466|height=349]

Don;t get me wrong. I think that any increase in rates will dampen home prices further. But sustained higher inflation that accompanies those rates would likely result in price increases down the road. Long-term prices track inflation. Rate changes cause deviations from this track.

[Bugs]

If you’re going to look at national figures then your argument is about national figures, not local figures. If you look at prices locally between 1989-1996 and several other 7-year periods in our history you will see the reverse of prices tracking inflation. If you narrow your window to 5-years or 3 years you’ll see even more examples of that.

Incidentally, the changes in 1975-1982 time frames were due in part to the changes in the tax code, and in California, due to the effects of Proposition 13. Tying property taxes to purchase prices rather than to market value had a huge effect over the long term to the pricing structure.

[FutureSDguy]

Earlier in the thread, renterclint says: “To be honest, I am bitter. The bankers w/ all their cheap $$ have ruined my hometown’s housing market. In two years, if things don’t look different, I’ll be moving as well.”

I will posit that this really isn’t the case. True, banks have contributed to the dramatic rise in the price of the homes (lets say a triping in price over 10 years = +200%). Let’s say that they’re the sole reason. Now take your evil bankers out and just apply a normal 6% appreciation to the value of the home (+79% over 10 years), regardless of the where comps currently stand. You can easily sell your house today on that metric, because it’s super competitive compared to the rest. So the real problem lies in the sellers who *can* sell at the lower appreciation rate, but won’t.

The prices will correct to whats affordabile (before adding the premium of living in S. Cal), because I believe that all markets return to fundamentals. But this is going to happen in lockstep, because people set prices at the margin, which unfortunately is at bubble prices rather than what how real estate should be doing in an average market. Once you have the 10-year owners stop being greedy, the rest will follow.

BTW, it’s okay to be “greedy” on the way up. I believe one should always try to make as much money as they can. But being greedy on the way down is just forestalling the inevitable.

[sdduuuude]

Meeeeoooowww
Ack
Boing
Wheeeeeeeeeeeeeeeeeeee

[(former)FormerSanDiegan]

Bugs – I was simply responding to jg’s argument, which was based on national figures.

You are right, the shorter the period you consider, the more sensitivity you have to interest rate movements.

My general point is that housing prices are not immune from inflation over longer periods, however, I concede that short term price movements are correlated with change in rates.

My argument is simple (and circular): Higher prices (inflation) result in higher prices.

Incidentally, the changes in 1975-1982 time frames were due in part to the changes in the tax code, and in California, due to the effects of Proposition 13. Tying property taxes to purchase prices rather than to market value had a huge effect over the long term to the pricing structure.

I believe that the changes were because higher inflation means higher prices, not due to Prop 13 or other tax code changes. How does the Prop 13 affect prices to the upside? I would argue that Prop 13 suppresses prices by reducing a potential pool of buyers. This pool of buyers are people who are reluctant to move out of their low cost-basis property because they are paying significantly lower property taxes than if they moved. I know several people who would consider moving, but do not want a $500 – $600 per month increase in their property taxes.

What other tax code changes were enacted in 1975-1982 ?

[PerryChase]

I believe that the changes were because higher inflation means higher prices, not due to Prop 13 or other tax code changes. How does the Prop 13 affect prices to the upside? I would argue that Prop 13 suppresses prices by reducing a potential pool of buyers.

Prop 13 probably translated into immediate increases that got built-into the prices of houses that were selling at the time — just like tax breaks get priced-into asset prices. Therefore we are better off letting the market do its own things and forget the tax incentives.

If people don’t sell their houses, that reduces inventory. Old-time owners would require a bigger windfall to be coaxed into buying a new house with a higher tax basis. How would that depress prices?

I’m reluctant to sell my house because of my lower property tax basis. I’d have to sell at a proportionately higher price to be persuaded to pay higher property taxes. $600/mo increase in property taxes means one extra nice vacation each year. I wouldn’t want to give that up by moving to a house that isn’t at least $600/mo better.

[(former)FormerSanDiegan]

Prop 13 probably translated into immediate increases that got built-into the prices of houses that were selling at the time — just like tax breaks get priced-into asset prices.

Logical argument. But that’s not what happened.
Years 1982-1984 are the flattest part of the home price curve in the 1975-1990 segment. So, if what you described was the effect in CA it was either overwhelmed or diluted by other effects across the country.

[qcomer]

I would like to add to the inflation and housing price discussion. I think both parties are making the same point.

A house consists of real assets (timber,concrete,steel,land). With inflation, the price of these assets increase as it takes more money to construct the same house. The higher inflation cycle is caused by easy money flow (low rates) which causes home prices to rise as more money competes for same assets.

Govt interest rates “follow” inflation and as often we have seen, only start going up after inflation is out of control already. It means the asset prices had already risen when interest rates start rising to squeeze out the easy money. This is what happened from 2000-2005 as low rates eventually caused inflation in housing, stock prices, commodity prices, etc. More inflation is caused as eventually greed sets in with a belief that asset prices will keep rising and some assets end up in a bubble. Once that inflation ginnie is out officially then Fed started raising rates in 2004. After sometime, when effect of rate hikes start setting in, it marks the beginning of a deflationary period when asset prices start to fall.

In conclusion, with higher inflation, asset prices rise. This is followed by higher interest rates, that cause asset prices to fall. I believe the Fed still needs to raise rates further to really hurt this liquidity beast and begin a much needed deflationary period.

[Bugs]

Again, California is California and does not represent what happened nationwide.

Besides, the effects of Prop.13 on the baseline set in prior to 1982.

[Anonymous]

qc, I fully agree with your logic; fine explanation.

[Author]

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