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Strategies & Market Trends : US Economic Trend Analysis
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To: gpowell who wrote (13)8/26/2005 1:22:00 PM
From: GraceZ of 97
 
Does not the price of a home reflect, in part, the net present value of housing services?

Of course it does and that is the reasoning behind my recent example, on another thread, as to why the monthly cost of a mortgage could rise so much above rental rates. Still I think that most individuals buying a house tend to think that the future cost of housing services will rise above the current inflation expectation, that it will rise at a faster rate than the real cost of the 5.5% bond (mortgage) they sell in order to get into the house. Maybe because this is what they've experienced within their lifetimes.

Can it not also reflect a perception that real scarcities exist.

That perception is certainly firmly entrenched in some of the markets with the highest price increases. Anti-growth initiatives and "free space" initiatives have reduced marginal supply below marginal demand for decades in some areas. Higher prices have brought in some increases in supply, but only at much higher prices and demand increased just ahead of supply. When the bulk of demand lay underneath the market or if local governments remove the artificial restraints on supply we will see prices move back down. In places (like Texas) where there is no artificial or geographic restraint on supply, prices have moved relative to the low level inflation we are experiencing.

What we are seeing now is demand which is below the market in certain areas moving to other areas where prices are in aggregate lower. This is how inflation gets around, substitution to those goods which haven't moved up in price yet.
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