US Economic Trend Analysis Message Board

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Strategies & Market Trends : US Economic Trend Analysis

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To: GraceZ who wrote (12)	8/22/2005 4:49:56 PM
From: gpowell	Read Replies (1) of 97

Housing prices also reflect inflation expectations. In which direction? Does not the price of a home reflect, in part, the net present value of housing services? Thus, home prices will rise with falling inflation expectations to the extent those expectations are embodied in the nominal interest rate. Most people expect to pay off their home mortgage with cheaper money in the future or higher future incomes (otherwise they wouldn't max out their borrowing) Higher future incomes, more likely. The lower the risk of moral hazard, the more likely it is for future income to be brought into the present (thus, the more likely for a borrower to "max out"). Inflation expectations will be imbedded in the mortgage rate – so, unless there is unexpected inflation, the cheaper dollars paid in the future is exactly paid for with more dollars in the present. The first time you get the attitude that one needs to buy something today before it goes up in price reflects an expectation for inflation. Can it not also reflect a perception that real scarcities exist.

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