Wednesday, December 08, 2010

CNBC housing debate

In the video, Susan Wachter is misleading. Price-to-rent ratios are out of line, not just by 1890 levels, but also by 1970-1999 levels—basically all of the pre-bubble period. From 2007-2008, prices were falling rapidly until the Federal government stepped in to prop them up.

Hat tip to an anonymous Bubble Meter commenter.


  1. I am pretty stunned by rents in DC also; yes, in other parts of the country, it's pretty clear that the ratios are out of line, but here...rents are as bubblicious as prices. I'm constantly impressed by the premium that "pay my mortgage for me" rowhouse basement apartments pull down. The price for the privilege of being a basement dweller just amazes me.

  2. Schiff right yet again. She appears to me as yet another person who does not offer any net value as an "employed" person.

  3. Wow, she really doesn't seem to make much sense here. Obviously i'm biased in that i already disagreed with her before watching, but she just doesn't seem to know the facts or make a strong, logical argument. For example when she says to Schiff, "Do you want rates to go up?". It has nothing to do with what he want, its an inevitable fact that they will and the effect seems almost certainly to be serious further price declines.

  4. @kahner - so, this is the $64k question (well, it's a lot more than $64k now): will higher rates in fact reduce prices, or will it simply further reduce volume?

    I've heard it argued that in the last serious rate crunch (early 80s) the effect was not really to take the inflation back out of housing, but to reduce volume to a trickle. I wonder if that is only because the Volcker crunch was relatively short-lived? If it had been longer, would it have sent house prices down eventually, as incomes remained stagnant?

    @nonpartisan: Agreed - Schiff has been on spot WRT housing for ever. Some of his hard money/gold/Austrian policies are a bit unreal.

  5. I would surmise, and this is off the cuff opinion without much to back it up, that it will lead to price reductions for 2 main reasons.

    1) Prices are high by historical norms based on Price/rent and price/income also i believe. Price rent is probably more important since on a rational investment basis your future cash flows and cost of capital for the investment have to determine price you'll pay.
    2) As you say, this won't be a short term rate jump. Its a move to "normal" mortgage rates from a historic extreme low.

    But people are intrinsically irrational, and even if they do act rationally its only on the basis of what they know and understand. I'm sure few home buyers know how to calculate the true cost/benefit of rent vs own. Plus folks are emotionally attached to their homes and their supposed equity. They HATE to sell and realize the loss. So for a long period, 3-5 years maybe, I could see volume go to a trickle. But eventually I think prices should correct downward in response to higher rates.

    (was that enough hedging for you?)

  6. They both agree that higher rates will produce lower home prices. Where is Mr. Seattle Chart aka realtor?

  7. I think the low volume will lead to lower prices - not only is it a return to normal rates, but really, people have been stretching, even with low UE in DC, to leverage their income up this much.

  8. I believe that the original question was something like "are lower housing prices a good thing for the economy?"

    The answer is, of course, yes -- at lest over the long term. When people have to spend less on keeping roofs over their heads, it frees up capital for more productive purposes. Lower housing prices are good for the same reason that lower food and energy prices are.

    The resistance to falling prices comes from those who would lose out on the deal -- banks, local governments, REALTORS(R), etc. However, this is no more an argument for keeping housing prices high than oil speculators' interests are in keepin crude prices high.

  9. The experts say don't buy a home in the next three years!

  10. Mr. Seattle Blog Post...come out and plaaaaayyyyy!

    Mortgage rates will start to rise in 2011, further dampening demand and limiting affordability, said Pete Flint, chief executive of, a real estate search and research website. "Nationally, prices will decline between 5 percent and 7 percent, with most of the decline occurring in the first half of next year," he said.

    Interest rates on 30-year fixed rate loans will creep up to 5 percent, and that alone will add $120 per month to the typical mortgage payment on a $400,000 loan, Flint said in a joint news conference.

  11. for the next three years???? wow.