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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Elroy Jetson who wrote (2713)3/23/2004 12:50:28 AM
From: CalculatedRisk  Read Replies (2) of 116555
 
Home prices: Thanks for the interesting charts!

Here is a look at the period from Jan 1998 until Jan 2004. I chose this period since this is where it appears housing prices took off.

1) Home prices increased 49% nationwide during the 6 year period.
ofheo.gov

2) Although real household incomes have decreased, with inflation household incomes have increased 11% from ’98 to ’03. ('03 is not available, but I guessed)
census.gov

3) Mortgage rates (30 year fixed) declined from 6.99% in Jan 1998 to 5.71% in Jan 2004.
freddiemac.com

The drop in interest rates would predict a 22.5% increase in potential debt to keep the buyer’s monthly payment the same. However, as I pointed out in my model of home prices, taxes would have also increase based on the value of the home.

Therefore, my simple model would have predicted a 15% increase in prices due to changes in interest rates and 11% due to increases in household incomes (because of inflation). Taking the multiple, the model would have predicted an increase of 28%, instead of the 49% increase we observed.

This would argue (if ’98 prices were reasonable) that home prices are approximately 20% overvalued due to speculation or easy terms (ARMs, 0% down, etc). If mortgage interest rates increase, or we have a recession (lower household income), home prices would be even more out of line.
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