What home prices would be without the bubble

[Rich Toscano]

Hi Stan – Great point about rents. I would also add another point if you are assuming static rates and inflation: if rates and inflation can both be assumed to be low, the “real” burden of your debt will stay higher through the amortization. In contrast, if rates/inflation are high, you are paying more interest, but you are basically paying off your mortgage faster as inflation eats away at the real burden of your principal.

But, what I was more attempting to get at was the fact that rates and inflation are NOT static. So discounting future income using today’s 10-year Treasury doesn’t really take that into account, if I am understanding you correctly.

And again, I’m kind of muddying the waters here by trying to figure out not one guy’s decision to buy or not, but rather what represents a fundamentally justifiable, sustainable level of pricing. For this latter, it seems to me that one must take the long view on rates. Or, that one should ignore rates altogether, because A) they haven’t had much impact historically and B) since their future direction is unknown, they shouldn’t figure into pricing. Or something.

I’m pretty exhausted and out of it this evening so the above may or may not make sense. Thanks for sharing your insights.

Rich

PS – Ray – In bonds, you care not just about the current rate but about future rates. I’m arguing that the same is true in housing.

[Rich Toscano]

Hi Stan – Great point about rents. I would also add another point if you are assuming static rates and inflation: if rates and inflation can both be assumed to be low, the “real” burden of your debt will stay higher through the amortization. In contrast, if rates/inflation are high, you are paying more interest, but you are basically paying off your mortgage faster as inflation eats away at the real burden of your principal.

But, what I was more attempting to get at was the fact that rates and inflation are NOT static. So discounting future income using today’s 10-year Treasury doesn’t really take that into account, if I am understanding you correctly.

And again, I’m kind of muddying the waters here by trying to figure out not one guy’s decision to buy or not, but rather what represents a fundamentally justifiable, sustainable level of pricing. For this latter, it seems to me that one must take the long view on rates. Or, that one should ignore rates altogether, because A) they haven’t had much impact historically and B) since their future direction is unknown, they shouldn’t figure into pricing. Or something.

I’m pretty exhausted and out of it this evening so the above may or may not make sense. Thanks for sharing your insights.

Rich

PS – Ray – In bonds, you care not just about the current rate but about future rates. I’m arguing that the same is true in housing.

[Rich Toscano]

Hi Stan – Great point about rents. I would also add another point if you are assuming static rates and inflation: if rates and inflation can both be assumed to be low, the “real” burden of your debt will stay higher through the amortization. In contrast, if rates/inflation are high, you are paying more interest, but you are basically paying off your mortgage faster as inflation eats away at the real burden of your principal.

But, what I was more attempting to get at was the fact that rates and inflation are NOT static. So discounting future income using today’s 10-year Treasury doesn’t really take that into account, if I am understanding you correctly.

And again, I’m kind of muddying the waters here by trying to figure out not one guy’s decision to buy or not, but rather what represents a fundamentally justifiable, sustainable level of pricing. For this latter, it seems to me that one must take the long view on rates. Or, that one should ignore rates altogether, because A) they haven’t had much impact historically and B) since their future direction is unknown, they shouldn’t figure into pricing. Or something.

I’m pretty exhausted and out of it this evening so the above may or may not make sense. Thanks for sharing your insights.

Rich

PS – Ray – In bonds, you care not just about the current rate but about future rates. I’m arguing that the same is true in housing.

[drunkle]

what about the downpayment aspect of home pricing? that is, with no downpayment, you could afford to pay the same to own as you pay in rent. that being the primary reason under “normal” 20% down scenario that people still rent even if the monthly cost is the same as buy. they just dont have the down, can’t save the down and when they try, when the economy is doing well and they can afford to save, so can everyone else…

edit:

and with regards to stocks and bonds, what are the normal barriers to investing? ie., prior to etrade and 401k’s, wasn’t a minimum investment of some significant size required? even opening a cd requires a deposit larger than most people (j6p) are able or willing to drop…

[drunkle]

what about the downpayment aspect of home pricing? that is, with no downpayment, you could afford to pay the same to own as you pay in rent. that being the primary reason under “normal” 20% down scenario that people still rent even if the monthly cost is the same as buy. they just dont have the down, can’t save the down and when they try, when the economy is doing well and they can afford to save, so can everyone else…

edit:

and with regards to stocks and bonds, what are the normal barriers to investing? ie., prior to etrade and 401k’s, wasn’t a minimum investment of some significant size required? even opening a cd requires a deposit larger than most people (j6p) are able or willing to drop…

[drunkle]

what about the downpayment aspect of home pricing? that is, with no downpayment, you could afford to pay the same to own as you pay in rent. that being the primary reason under “normal” 20% down scenario that people still rent even if the monthly cost is the same as buy. they just dont have the down, can’t save the down and when they try, when the economy is doing well and they can afford to save, so can everyone else…

edit:

and with regards to stocks and bonds, what are the normal barriers to investing? ie., prior to etrade and 401k’s, wasn’t a minimum investment of some significant size required? even opening a cd requires a deposit larger than most people (j6p) are able or willing to drop…

[drunkle]

what about the downpayment aspect of home pricing? that is, with no downpayment, you could afford to pay the same to own as you pay in rent. that being the primary reason under “normal” 20% down scenario that people still rent even if the monthly cost is the same as buy. they just dont have the down, can’t save the down and when they try, when the economy is doing well and they can afford to save, so can everyone else…

edit:

and with regards to stocks and bonds, what are the normal barriers to investing? ie., prior to etrade and 401k’s, wasn’t a minimum investment of some significant size required? even opening a cd requires a deposit larger than most people (j6p) are able or willing to drop…

[drunkle]

what about the downpayment aspect of home pricing? that is, with no downpayment, you could afford to pay the same to own as you pay in rent. that being the primary reason under “normal” 20% down scenario that people still rent even if the monthly cost is the same as buy. they just dont have the down, can’t save the down and when they try, when the economy is doing well and they can afford to save, so can everyone else…

edit:

and with regards to stocks and bonds, what are the normal barriers to investing? ie., prior to etrade and 401k’s, wasn’t a minimum investment of some significant size required? even opening a cd requires a deposit larger than most people (j6p) are able or willing to drop…

[gdcox]

Just a small point re ‘Also, one merely needs to look at historical price data (OFHEO) to understand that there was not a significant price decline at the time.’

You have to remember that in the 70s and 80s inflation was high. Even if house prices were stable in nominal terms they were going down fast in real terms .

Graham

[gdcox]

Just a small point re ‘Also, one merely needs to look at historical price data (OFHEO) to understand that there was not a significant price decline at the time.’

You have to remember that in the 70s and 80s inflation was high. Even if house prices were stable in nominal terms they were going down fast in real terms .

Graham

[gdcox]

Just a small point re ‘Also, one merely needs to look at historical price data (OFHEO) to understand that there was not a significant price decline at the time.’

You have to remember that in the 70s and 80s inflation was high. Even if house prices were stable in nominal terms they were going down fast in real terms .

Graham

[gdcox]

Just a small point re ‘Also, one merely needs to look at historical price data (OFHEO) to understand that there was not a significant price decline at the time.’

You have to remember that in the 70s and 80s inflation was high. Even if house prices were stable in nominal terms they were going down fast in real terms .

Graham

[gdcox]

Just a small point re ‘Also, one merely needs to look at historical price data (OFHEO) to understand that there was not a significant price decline at the time.’

You have to remember that in the 70s and 80s inflation was high. Even if house prices were stable in nominal terms they were going down fast in real terms .

Graham

[gdcox]

Great contributions from everyone….all of us trying to put in 2D text what should be in a multi-factor model of great complexity (and in fact impossible to build).

One analytical method that must now be deemed impossible is any kind of model for mortgage supply and demand (which feeds into the house price model). The impact of structural change in the supply of mortgages and their types has been so extreme in the last five to ten years (of which the arrival of ARMs in their various guises is only one of many factors) that no sensible time series could be constructed now in my view. The chaotic effect of the current credit crisis (and legislative reactions as well) will just muddy the regression waters some more.

That is partly why I instinctively favor looking at the rental/buy decision and landlord investment buy/sell decision in simple terms to try to feel for inflexion points in the residential real estate market.

As various contributors have pointed out , we cannot be sure what rent levels will be. Rents should rise with repos (as happened in the mid 80s) varying by area as well, but a recession would tend to restrain growth of income and hence rents as has been pointed out . Hope people feed back on the rental market over time .

Graham

[gdcox]

Great contributions from everyone….all of us trying to put in 2D text what should be in a multi-factor model of great complexity (and in fact impossible to build).

One analytical method that must now be deemed impossible is any kind of model for mortgage supply and demand (which feeds into the house price model). The impact of structural change in the supply of mortgages and their types has been so extreme in the last five to ten years (of which the arrival of ARMs in their various guises is only one of many factors) that no sensible time series could be constructed now in my view. The chaotic effect of the current credit crisis (and legislative reactions as well) will just muddy the regression waters some more.

That is partly why I instinctively favor looking at the rental/buy decision and landlord investment buy/sell decision in simple terms to try to feel for inflexion points in the residential real estate market.

As various contributors have pointed out , we cannot be sure what rent levels will be. Rents should rise with repos (as happened in the mid 80s) varying by area as well, but a recession would tend to restrain growth of income and hence rents as has been pointed out . Hope people feed back on the rental market over time .

Graham

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