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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: GraceZ who wrote (3727)	7/31/2002 2:02:43 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

This is all very interesting, but you continue to mix microeconomic analysis with macroeconomics. In 1900 beach-front property in Los Angeles was very undesirable, suitable for fisherman but not for proper people. Wealthy people lived inland, say in West Adams, where the weather was warmer. Today the weather at the beach is not any warmer, but the land there is far more desirable and expensive than land in West Adams (which is today a slum - even though there are many fine Victorian era mansions there). Appraisers would call this Economic Obsolescence. To an economist this is an example of a shift in demand preference - a microeconomic factor that does not affect the macroeconomics of real estate. In terms of macroeconomics real estate matched GDP (income) in appreciation from 1890 to 1945. The microeconomic fact of shift in demand preference from West Adams to the formerly worthless land of Malibu Beach is simply not relevant, however maddening it may be for property owners in West Adams. Confusing Microeconomics with Macroeconomics only prevents insight. Similarly, take the situation of public subsidies. A Condominium and the Apartment Building across the street both pay property taxes and interest on a mortgage. Both items attract an income tax subsidy (deduction) on both properties. But the profit on the appreciation of the Apartment Building is taxable while an enormous amount of the profit on the appreciation of the Condo is tax-free. This subsidy of one particular type of investment is a welfare program which causes un-economic distortions in the marketplace. I don't believe this type of government intervention is helpful or appropriate. Of course I acknowledge the recipients of the government welfare program may have an entirely different opinion. Your point that the owner of the Apartment building is likely to be well off and should therefore pay through the nose in taxes, while the Condo owner likely earns less than $26,415 so the appreciation on his Condo should be tax-free is noted, but misplaced. It is just as likely that a multi-millionaire owns the city-view Condo while a poor laboring family owns the Apartment Building as their sole investment. Regardless of the wealth of the owner, there is no reason to so heavily subsidize one type of real estate investment at the expense of investments in other types of real estate, stocks, bonds, diamonds, or art. From a macroeconomic perspective the government subsidy for homeowner real estate provides a one-time permanent increase in the value of that investment at the expense of other investments. (Permanent that is until the welfare program is ended.) There should be no confusion that the government subsidy makes homes more affordable. Aggregate Home prices will increase by the exact amount of the subsidy. The subsidy is merely a government welfare program for home-owners. These persons are no more deserving of feeding at the public trough than are diamond owners, or bond holders. Various government subsidy programs after 1945 caused several distinct one-time permanent divergences between GDP (Income) and Real Estate prices in Los Angeles County. Understanding of this fact can be confused by introducing microeconomic factors into a discussion of macroecconomics. Phrases like: cost-push supply inflation; demand side economics; marginal supply; local initiatives, etc - are all terms which indicate microeconomic analysis is being applied. An interesting topic perhaps, but not relevant to a macro-economic analysis of real estate prices and whether there is a price bubble in real estate. A dictionary can be a most helpful starting point to help clarify this distinction. Macroeconomics yourdictionary.com Microeconomics yourdictionary.com An analogy with the stock market can be made. In retrospect most would agree that the stock market was recently in a bubble. The fact that you owned stock in the obscure firm of Quigley's Fine Gift Wrap (QFGWCO) which did not appreciate in price during the bubble, does not in any way invalidate the fact that the stock market was in a bubble. In fact QFGWCO may fall in price in the bubble aftermath in spite of its previous non-participation. Or it may remain unaffected. But specious arguements that the stock market is a market of individual stocks so a bubble is not possible can be recognized by most as missing the point.