The Epic American Credit and Bond Bubble Laboratory Message Board

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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: GraceZ who wrote (69782)	9/15/2006 10:19:57 AM
From: Wyätt Gwyön	Read Replies (2) of 110194

I know that sounds counter intuitive, but consider that a house can be looked at as an investment that yields a return. In this case, the return is housing services. The value of those future housing services has a net present value and in a low to falling inflation rate environment the net present value rises the same way the value of a bond that pays a fixed income over it's life rises when inflation expectations fall the reason it sounds "counter intuitive" is that it is wrong. that is a very confused theory. it is much easier to recognize that housing prices have gone up somewhat because interest rates are lower. obviously, if you compare a 10% mortgage with a 6% mortgage, assuming the same dollar amount monthly payment, the 6% mortgage will have a higher principal amount. there is no need to consider claptrap about "housing services" being discounted to a higher NPV due to reduced inflation expectations. just look at the interest rates. of course, interest rates themselves reflect inflation expectations--the expectations of wealthy bond buyers, not the expectations of unwealthy people who need mortgages to buy homes. not that the bond buyers' expectations will prove accurate, any more than double-digit yields on 30yr Treasurys accurately forecasted inflation from 1981. today's housing bubble reflects more than low interest rates, of course. it also reflects declining credit standards (credit bubble). additionally, it reflects a bubble mentality where buyers in fact IGNORE the "service" value of homes (as opposed to performing some NPV discounting based on abstract service value claptrap) and focus on anticipated profits from price momentum. they might as well be trading tulips, or crappy tech stocks circa March 2000. thus buyers ignore housing services in expectations of higher housing prices (expectations of increasing and continued inflation, not reduced inflation expectations as per your suggestion). they are enabled to pay higher prices due to lower interest rates and lower credit standards. your suggested analysis could not be more wrong if it tried.

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