What home prices would be without the bubble

[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

[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

[jpinpb]

Eventually those bank owned homes will sell and back in use by someone who won’t be renting. Ease the rental market strain.

Seems there is some correlation also between the builders cutting back on future building, causing concern of decrease of homes. However, with the continued tightening of credit standards, that decreases the buyers.

I’m personally amused by the incentives of builders, upgrades, etc. Really, the only thing that will sell is drastic reduction in price. DR Horton seems to have figured that out. Maybe some others will follow suit.

[jpinpb]

Eventually those bank owned homes will sell and back in use by someone who won’t be renting. Ease the rental market strain.

Seems there is some correlation also between the builders cutting back on future building, causing concern of decrease of homes. However, with the continued tightening of credit standards, that decreases the buyers.

I’m personally amused by the incentives of builders, upgrades, etc. Really, the only thing that will sell is drastic reduction in price. DR Horton seems to have figured that out. Maybe some others will follow suit.

[jpinpb]

Eventually those bank owned homes will sell and back in use by someone who won’t be renting. Ease the rental market strain.

Seems there is some correlation also between the builders cutting back on future building, causing concern of decrease of homes. However, with the continued tightening of credit standards, that decreases the buyers.

I’m personally amused by the incentives of builders, upgrades, etc. Really, the only thing that will sell is drastic reduction in price. DR Horton seems to have figured that out. Maybe some others will follow suit.

[jpinpb]

Eventually those bank owned homes will sell and back in use by someone who won’t be renting. Ease the rental market strain.

Seems there is some correlation also between the builders cutting back on future building, causing concern of decrease of homes. However, with the continued tightening of credit standards, that decreases the buyers.

I’m personally amused by the incentives of builders, upgrades, etc. Really, the only thing that will sell is drastic reduction in price. DR Horton seems to have figured that out. Maybe some others will follow suit.

[jpinpb]

Eventually those bank owned homes will sell and back in use by someone who won’t be renting. Ease the rental market strain.

Seems there is some correlation also between the builders cutting back on future building, causing concern of decrease of homes. However, with the continued tightening of credit standards, that decreases the buyers.

I’m personally amused by the incentives of builders, upgrades, etc. Really, the only thing that will sell is drastic reduction in price. DR Horton seems to have figured that out. Maybe some others will follow suit.

[SHILOH]

Is the median home price to median income correlation reliable to predict income to house market trends, if there is no data to show percentages of households who earn “the median ie $55K, v. the number of homes priced at the median?

I would think the only way to figure how long an inventory of median priced homes would last…is to know how many households have a median income.

Since the median is not the same as the average. What if the median is $55K but the average is $80K?

[SHILOH]

Is the median home price to median income correlation reliable to predict income to house market trends, if there is no data to show percentages of households who earn “the median ie $55K, v. the number of homes priced at the median?

I would think the only way to figure how long an inventory of median priced homes would last…is to know how many households have a median income.

Since the median is not the same as the average. What if the median is $55K but the average is $80K?

[SHILOH]

Is the median home price to median income correlation reliable to predict income to house market trends, if there is no data to show percentages of households who earn “the median ie $55K, v. the number of homes priced at the median?

I would think the only way to figure how long an inventory of median priced homes would last…is to know how many households have a median income.

Since the median is not the same as the average. What if the median is $55K but the average is $80K?

[SHILOH]

Is the median home price to median income correlation reliable to predict income to house market trends, if there is no data to show percentages of households who earn “the median ie $55K, v. the number of homes priced at the median?

I would think the only way to figure how long an inventory of median priced homes would last…is to know how many households have a median income.

Since the median is not the same as the average. What if the median is $55K but the average is $80K?

[SHILOH]

Is the median home price to median income correlation reliable to predict income to house market trends, if there is no data to show percentages of households who earn “the median ie $55K, v. the number of homes priced at the median?

I would think the only way to figure how long an inventory of median priced homes would last…is to know how many households have a median income.

Since the median is not the same as the average. What if the median is $55K but the average is $80K?

[(former)FormerSanDiegan]

gdcox wrote : As a financial economist by background, I think the methodology of using static data from the past is suspect; especially in isolation. Much better to make a current dynamic comparison with the rental markets. As house prices fall this and possibly next year, there will come a point at which it is cheaper for people to buy on a mortgage than to rent and another point at which the rental yield on repossessed properties becomes irresistibly attractive for landlords. These two points may coincide in time of not. But either way, the bubble will have been eliminated by definition when landlord and renters are incentivized and act to buy en masse.

I have to agree 100% with gdcox with respect to these statements. By using current rents and current carrying costs you don’t have to worry about all the academic issues about whether higher interest rates or inflation were a factor or not in impacting historical price to income ratios. Those metrics are excellent for point out the bubble and tracking historical changes. BUT, the ultimate fundamental in my opinion is how rents relate to carrying costs on a property. If you look at prices, rents and carrying costs as an ongoing business concern, it is insightful.

SFRs in central San Diego currently rent for about 7% of the property value. If property values drop by 30% you are looking at 10% gross. If they dropped by 60% you’d be looking at 17.5 % gross.
Somewhere in there prices, rents and interest rates will result in situations where it makes sense as a business to own property.

This calculation depends on prevailing rates on alternative investments, mortgage rates/availability, rents, and home prices.

My guess is that we will see these things line up to make owning property as a business at price points no lower than about 15% below current prices. Rents dropping more than a few percent and/or interest rates going above 7-8% would change this.

[(former)FormerSanDiegan]

gdcox wrote : As a financial economist by background, I think the methodology of using static data from the past is suspect; especially in isolation. Much better to make a current dynamic comparison with the rental markets. As house prices fall this and possibly next year, there will come a point at which it is cheaper for people to buy on a mortgage than to rent and another point at which the rental yield on repossessed properties becomes irresistibly attractive for landlords. These two points may coincide in time of not. But either way, the bubble will have been eliminated by definition when landlord and renters are incentivized and act to buy en masse.

I have to agree 100% with gdcox with respect to these statements. By using current rents and current carrying costs you don’t have to worry about all the academic issues about whether higher interest rates or inflation were a factor or not in impacting historical price to income ratios. Those metrics are excellent for point out the bubble and tracking historical changes. BUT, the ultimate fundamental in my opinion is how rents relate to carrying costs on a property. If you look at prices, rents and carrying costs as an ongoing business concern, it is insightful.

SFRs in central San Diego currently rent for about 7% of the property value. If property values drop by 30% you are looking at 10% gross. If they dropped by 60% you’d be looking at 17.5 % gross.
Somewhere in there prices, rents and interest rates will result in situations where it makes sense as a business to own property.

This calculation depends on prevailing rates on alternative investments, mortgage rates/availability, rents, and home prices.

My guess is that we will see these things line up to make owning property as a business at price points no lower than about 15% below current prices. Rents dropping more than a few percent and/or interest rates going above 7-8% would change this.

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