What home prices would be without the bubble

[(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.

[(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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