I thought real estate was overpriced when they were a tenth of the price
it could be, depending on the longterm cost of money and credit availability. if you knew what this is, you would know the real present value of everything. e.g., even somebody as debt-averse as myself would be happy to take on hundreds of millions of debt to buy RE, if, for example, i could lock in 100-yr I/O mortgages at 0.1%. the only criterion would be to have cash-flow sufficient to cover all taxes/expenses/depreciation, plus, say 1% positive cash flow.
OTOH, if real interest rates were known to be in double digits for the next 100 yrs, very few RE investments would make sense except at steep discounts.
RE could have seemed overpriced in the 1980s if one assumed continued high real interest rates, just as today it could seem underpriced if one assumes continuation of the opposite. what foiled the bears was a return to trend from expensive money in the 1980s, just as in the 2000s the bulls will be foiled by an end of cheap and easy credit.
what we see in real market prices today is that the market is assuming very low cost of money combined with high credit availability (quite ludicrous based on historical standards) for a long, long time. thus, it seems to me if the cost of money and credit availability can be expected to return to trend, a housing crash is inevitable. |
