Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Amy J who wrote (8796)	2/10/2003 9:47:46 AM
From: Elroy Jetson	Read Replies (2) \| Respond to of 306849

Real estate prices follow measures of income very closely, when adjusted for interest rates (effective income). There is no linkage between inflation and real estate prices. There is a linkage between inflation and mortgage rates, the value of money and the cost of renting money. Since income is measured in money, the linkage between money and inflation affects how income is measured and thus real estate. Since 1930 US income has increased about 3.0% per year more than inflation. Real estate prices have exactly matched this increase in income. If real estate prices were linked to inflation since 1930, real estate prices would be 87% lower than they are currently. The primary connection between real estate and inflation is sloppy thinking. This is a chart showing real income growth, ie after removing inflation. econ.rochester.edu

To: Amy J who wrote (8796)	2/10/2003 11:02:52 AM
From: Elroy Jetson	Read Replies (3) \| Respond to of 306849

Try an example where incomes decline. Let's say a 20 year period where inflation rises 2% per year and incomes remain the same. In real terms that means they decline 2% per year. After 20 years you might expect real estate prices to be 48.6% higher. But I can assure you that real estate prices would be unchanged in nominal terms and 33.2% lower in terms of (inflation adjusted) real purchasing value. On a more insightful level, you can be certain that unusual periods of time during which real estate prices rise more than incomes are certain to be followed by a correction. The late 1980s and the most recent eight year time period are examples of this type of imbalance. A rise in real estate prices higher than incomes is followed real estate prices declining relative to incomes, as certainly as day follows night.