Home Prices Headed Down
Calculated Risk has a good post about home prices, looking at prices from several different angles. All angles suggest that prices have a ways further to go before reaching "normal." Of course, there's no reason to expect any time series to get back to normal, but it's a good first guess.
Why should housing prices be above their long-run normal ratio to something (rental rates, income) ?
- Low interest rates are a good argument for asset prices of all types to be high relative to rental income and household income.
- There's maybe a tax argument. (If I own a house, I can finance my car with a deductible home equity line; if I'm a renter, my car interest is not deductible.)
- Land scarcity with a rising population. I think that housing per se does not appreciate, but rather the land under the house appreciates. The exceptions would be in no-growth communities.
In my judgment, that's too weak a foundation for today's home prices being as high as they are relative to the long-run norms. But I'd be happy to listen to other reasons.
Comments
1. In the recent housing bubble, I think a major reason was speculation fuelled by ballooning money supply with associated low interest rates. Many buyers were “flippers,” but that process (buying to resell) increased demand, and thus prices. Economics 101.
2. A second factor was using low interest home equity lines of credit to compensate for stagnating incomes. As home values rose, people borrowed more. That fuelled economic expansion, kept money flowing, and encouraged higher risk speculative behaviour.
3. After the stock market crash of 2000, people turned to investing in homes as assets rather than equities.
I attribute all three behavioural patterns to excess liquidity promoted by an irresponsible Fed (as per Volcker vs. Greenspan) and an over-spending government.