Broken Clock: Right Twice a Day!
09/03/08 22:09 Filed in: Housing
Insanity
I was, oh, about six
years early to the housing-bubble party. It's a
lesson learned (along with google's stock price):
don't underestimate how long the market can stay
irrational because it will make you look very,
very
stupid. But it seems
that now most people are coming around and some
people are even talking about *gasp*
income-price ratios and
rent-vs-buy calculations.
One of the hard things in the rent-vs-buy calculation is that to do the calculation correctly, you have to make an assumption about the long-term appreciation of the home that you buy. This is why housing booms are self-reinforcing, even without a feckless central bank: as expected future returns increase, the NPV of houses increase, creating a self-fulfilling cycle. That, of course, is now being thrown into reverse: why would anyone throw a $50,000 deposit at housing when houses are going down in price? So a bank can eat that 50K while you ride the down cycle? Thanks, but no thanks.
Putting even further (and perhaps devestating) pressure on house prices will be Baby Boom demographics, as outlined here. The boomers have done a pretty good job of forward-shifting benefits (prescriptions, etc.) and back-shifting costs, but they are going to find that they are selling homes (and stocks) into a smaller market as they finance their retirement.
One of the hard things in the rent-vs-buy calculation is that to do the calculation correctly, you have to make an assumption about the long-term appreciation of the home that you buy. This is why housing booms are self-reinforcing, even without a feckless central bank: as expected future returns increase, the NPV of houses increase, creating a self-fulfilling cycle. That, of course, is now being thrown into reverse: why would anyone throw a $50,000 deposit at housing when houses are going down in price? So a bank can eat that 50K while you ride the down cycle? Thanks, but no thanks.
Putting even further (and perhaps devestating) pressure on house prices will be Baby Boom demographics, as outlined here. The boomers have done a pretty good job of forward-shifting benefits (prescriptions, etc.) and back-shifting costs, but they are going to find that they are selling homes (and stocks) into a smaller market as they finance their retirement.
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