[Rich Toscano]

[quote=AN][quote=Rich Toscano][quote=AN][quote=Rich Toscano]No, I don’t think the census got it wrong, but you are confusing inflation-adjusted figures for nominal ones.[/quote]Nominal median income in 2010 was $63069, inflation adjusted based on BLS would be $68,553.15 in 2015 $. Median income in 2015 was $64309. Which mean adjusted for inflation, the median income decreased by 6.19%. All the while, the population making >$150k has increased.[/quote]

You’re doing the inflation adjustment backwards. Median income increased by the difference between 63069 and 64309, plus what inflation was over that period.[/quote]
https://www.bls.gov/data/inflation_calculator.htm
Here’s what I used to find out what what inflation adjust $ would be. I have to adjust the number for inflation first before I compare the number. You don’t want to compare the number, and then adjust for inflation. $63069 in 2010 $ is not less than $64309 in 2015 $ when you adjust for inflation.[/quote]

The 2010 $63k figure is presumably inflation-adjusted to 2015 dollars. You are doing it backwards — unless you actually believe that nominal incomes DECREASED between 2010-2015.

[Rich Toscano]

[quote=no_such_reality][quote=Rich Toscano]
I was talking about this part:

[quote]During that period median income was essentially flat moving from $63K to $64K.[/quote]

No, I don’t think the census got it wrong, but you are confusing inflation-adjusted figures for nominal ones.[/quote]

That’s actually getting worse. FRED has data showing that. Other research shows that. Even research showing the millenials in spite of being better educated actually make 20% less than their baby boomer counterparts at the same point in the lives. And contrary to some opinions, it’s not because they’re lazy slackers, that’s us Gen-Xers.

And I’m not confusing inflation adjusted and not. Over 5 years, especially, recent 5 years, it’s pretty minimal, 8.7% over the period according to CPI.

You can chain it all the way back to 2000, 4.6% making over $150K, that’s $206K in 2015 dollars. Can we call it 4.6% making over $200K in 2015 dollar in 2000? It’s 2.8% of households growth in that segment.[/quote]

I don’t understand what you are trying to say here. I’m not talking about the ranges (over 150k or whatever), I am talking about this sentence:

“During that period median income was essentially flat moving from $63K to $64K.”

INFLATION ADJUSTED income went from 63-64k. Nominal income (which is what’s implied when you just say “income”) increased a lot more than that.

[Rich Toscano]

[quote=AN][quote=Rich Toscano]No, I don’t think the census got it wrong, but you are confusing inflation-adjusted figures for nominal ones.[/quote]Nominal median income in 2010 was $63069, inflation adjusted based on BLS would be $68,553.15 in 2015 $. Median income in 2015 was $64309. Which mean adjusted for inflation, the median income decreased by 6.19%. All the while, the population making >$150k has increased.[/quote]

You’re doing the inflation adjustment backwards. Median income increased by the difference between 63069 and 64309, plus what inflation was over that period.

[Rich Toscano]

[quote=no_such_reality][quote=Rich Toscano][quote=no_such_reality]
From 2010 – 2015, detached housing in San Diego county grew by just over 8800 units.

In that same period, households in San Deigo county making more than $200K/yr grew by 15,400 households. Household making $150K-$199k grew by 8900 households.

During that period median income was essentially flat moving from $63K to $64K.
[/quote]

There’s no way those income numbers are right.[/quote]

So you think the census screwed it up? https://factfinder.census.gov/bkmk/table/1.0/en/ACS/15_5YR/S1901/0500000US06073

2015, 7.4% of households are over $200K in San Diego County. Up from 6.2% in 2010.

If you prefer raw numbers https://factfinder.census.gov/bkmk/table/1.0/en/ACS/15_5YR/DP03/0500000US06073%5B/quote%5D

I was talking about this part:

[quote]During that period median income was essentially flat moving from $63K to $64K.[/quote]

No, I don’t think the census got it wrong, but you are confusing inflation-adjusted figures for nominal ones.

[Rich Toscano]

[quote=no_such_reality]
From 2010 – 2015, detached housing in San Diego county grew by just over 8800 units.

In that same period, households in San Deigo county making more than $200K/yr grew by 15,400 households. Household making $150K-$199k grew by 8900 households.

During that period median income was essentially flat moving from $63K to $64K.
[/quote]

There’s no way those income numbers are right.

[Rich Toscano]

[quote=gzz]

But as described here, there has historically been very little correlation between rates and home prices.

Depends on your time frame. I see the long term secular trend on prices going up and rates going down. Rates can’t explain the big bubble or the post-Cold-War bear market, but we know what caused them, and there is no reason to think that rates did not provide the trend line along which these shocks operated.
[/quote]

This is a good point.

As far as the whole topic: I see what you are getting at, but I don’t know how much it really matters in the end. I suppose if we could know for sure that rates would stay permanently low, and the whole market knew that for sure that and priced it in, then we might start to see that correlation you speak of. But we can’t know that; uncertainty is part of the market and always will be.

But also, yeah, it seems kind of moot, because I just don’t agree with your forecast. You are banking on something (bonds) going from “really expensive on a historical basis” to “really, REALLY expensive on historical basis,” all based on “this time is different” style economic narrative. It sounds like straight up bubble-style reasoning, tbh… rationalizing why the past “rules” don’t matter any more, and why an already very extended trend can be extrapolated permanently into the future. I just can’t abide by that kind of reasoning –but, I am a value/mean reversion guy, so you can’t expect much different of me. 🙂

So yeah, the disagreement is more about just the direction of rates than I initially thought. But it’s still more than just that, I think. You are making a forecast on rates, and then a forecast on how the housing market will react to rates. And while your reasoning for the second part is plausible, it is pretty different from how things have played out in the past unless you really squint your eyes…. and I think that’s important. But I understand your reasoning a lot better now.

[Rich Toscano]

[quote=Reality][quote=Rich Toscano]

I argue that there are some good reasons for this, but whether you agree with those reasons or not, the fact is that rates have had little influence on prices in the past. You are claiming a correlation (a causality, really) that isn’t there.
[/quote]

So you’ve changed your mind from this?:

May-June 2013 Data Rodeo — Price Explosion

“This is big, in my view. Low rates have been a big driver of housing demand, for both investors (who are seeking out yield wherever they can find it) and residents (who are compelled to buy due to the favorable rent-vs-buy comparison enabled by super low rates). This rate increase will almost certainly undercut both sources of demand.”[/quote]

Yes, I’d say I’ve changed my mind. I think that paragraph you quoted overstates the importance of rates, and it definitely overstates certitude, and I wouldn’t write that today.

That said I do acknowledge that rates are a piece of the picture, for sure. And I do acknowledge the possibilities that 1. low rates are helping keep home valuations high and 2. this could continue to be the case for some time.

What I push back against is this idea that monthly payments are all that matter, and that as long as rates are low, high purchase valuations are inconsequential. (Or, that homes are “undervalued” just because rates happen to be low right now).

Hope that clarifies where I’m coming from…

[Rich Toscano]

[quote=gzz]AN, I think where Rich disagrees with us is not the importance of payment ratios, but that he thinks rates may revert to historical means and send prices down. [/quote]

No. You claim rates and home prices reliably move inversely to each other. (For instance, in another thread, you said, “In the end, a house that rents for $2000 will go up in price with lower rates as surely as a bond that pays $2000 will go up.”)

But as described here, there has historically been very little correlation between rates and home prices. I argue that there are some good reasons for this, but whether you agree with those reasons or not, the fact is that rates have had little influence on prices in the past. You are claiming a correlation (a causality, really) that isn’t there.

That is my main point of disagreement.

Additionally, I happen to believe that rates are more likely to go up than down, but that’s secondary to my main disagreement.

On that second (lesser) topic…

[quote=gzz]I really see no reason why long term rates in the USA won’t fall below 1% [/quote]

Core inflation is at 2.3% and trending up. Median CPI (which according to Fed research has been the best predictor of the underlying inflation trend) is at 3.3%. So, there’s at least one reason for you.

If you want to make the case for sub-1% long term rates, go for it. But to say that there’s “NO reason” long term rates will stay above 1%, when inflation is significantly above that number… come on.

[Rich Toscano]

[quote=no_such_reality][quote=Rich Toscano][quote=no_such_reality]True, but only because the Government intervened and allowed all the weak hands to hold properties. Especially the banks.[/quote]

What’s that got to do with it?[/quote]

In order for prices to fall, homes have to be allowed to sell. That banks were allowed to constrict supply, not liquidate their repos, not foreclose and float their balance sheets to prevent steeper falls on home prices. You add HAMP, HARP and HARP 2.0 and homes that would have ended up on the market were all kept off the market.[/quote]

I meant, what does that have to do with the current conversation? I don’t see the relevance.

[Rich Toscano]

[quote=bewildering]There is zero chance of a 50% drop in house prices. There is a link between house prices and rent prices. Unless rent prices collapse then house prices will not fall by 50%.

Think about it. Even with a 20% drop in San Diego prices, it makes financial sense to buy a property and rent it out.

‘Nominal’ rental costs have never fallen in San Diego and demand for rentals remains high: http://www.deptofnumbers.com/rent/california/san-diego/%5B/quote%5D

Exactly. The post-bubble plunge happened because prices had become massively unhinged from rents (or incomes or any other fundamental). That’s just not the case now, to anywhere near that degree.

To put some numbers on it, here’s the price decline it would have taken to get to the historical median valuation (price to incomes and rents)… assuming there was no growth in rents/incomes during the price decline:

bubble peak: 42%
now: 16%

Just no comparison. If you are expecting a 50% decline, that means you are expecting prices to fall to their historically typical valuation, and then drop another 44% from that point, which would of course make them far cheaper than they’ve ever gotten. And that assumes no intervening rent/income growth, which of course there would be. It’s a mathematically indefensible forecast.

[Rich Toscano]

[quote=no_such_reality]True, but only because the Government intervened and allowed all the weak hands to hold properties. Especially the banks.[/quote]

What’s that got to do with it?

[Rich Toscano]

True, some individual homes fell more than 50%, but in aggregate (per Case Shiller) they fell by less than that — about 42% or so overall.

But, my point was more that you can’t expect or plan on something like that… that decline was the result of a giant bubble with epic overvaluation, nothing like what we are seeing now. And even then, the typical house didn’t drop by 50% — why would you expect that to happen now, when the valuation level is substantially more tame?

Great job buying your house, btw!

[Rich Toscano]

So your plan is to wait for a 50% home price decline? That didn’t even happen after the bubble…

[Rich Toscano]

Thanks Adam, haven’t heard from you in forever! Glad to hear you are still out there lurking. 🙂

[Rich Toscano]

Thank you!

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