San Diego Housing Market News and Analysis
responses to Rich on prices and rates
User Forum Topic
Submitted by gzz on March 12, 2017 - 12:07pm
Time for a new header!
I agree with all of this, which is why I said the source of our disagreement is where rates are headed.
Of course we agree that rents are part of the picture too. But we probably also agree where nominal rents are headed: going up roughly at or a little higher than the pace of nominal income growth. I say "a little higher" specific for San Diego since we some factors like high construction, permitting and land costs that restrict supply growth, plus the secular trend of people moving where the weather is nice and toward low-crime urban areas.
There is also the issue of down payments, which restrict buyers who can afford a specific monthly payments much more in the high price/low rate situation than in the reverse. It is hard to pin down this factor's effect, though I think down payment constrained buyers are not especially important to the market.
Next there is the issue of tight or loose lending. Then there are the animal spirits of investors and where their emotions are telling them to put money. I think they're both really important in the short to medium term, but in both cases they effect prices that still move along a fundamental rate/rent trend.
"In the end" is key here. The housing market is less efficient, less liquid, and less short-term rational than the bond market. In fact, my specific point there was that the local housing market had underperformed the given the change in rates, but only because it moves more slowly.
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.
The other big up-and-down was centered around 1980. I'd explain this by (1) the late 70's run up in prices was because people expected high inflation to be semi-normal (2) Volker jacked up rates and lowered inflation, to the point that by 1983-1985 inflation was much lower, but mortgage rates were still 12% and up! So of course prices would fall, expected rent increases went way down, while payments were extremely high and the drop in inflation meant that they'd stay high a lot longer.
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