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: Mr. Sunshine who wrote (11066)	6/4/2003 11:18:21 PM
From: Lizzie Tudor	Read Replies (3) \| Respond to of 306849

When inflation picks up, interest rates will rise, houses will be less affordable, and prices will likely decrease. I believe the opposite is true. What happened to houses in the 70s? That was the most inflationary period of recent history, no?

To: Mr. Sunshine who wrote (11066)	6/5/2003 5:52:57 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 306849

By your reasoning house prices should be fairly stable now since inflation is almost zero. don't be fooled by short-term volatility disparities between housing and inflation. over longer periods of time, house prices smoothed out will follow GDP growth, which is largely inflation, especially when you strip out the productivity lies. Not the case recently. In fact, low inflation has led to low interest rates, which has led to higher affordability of housing which has led to increased demand for housing which has led to higher housing prices. actually, low interest rates and inflation create the illusion of greater affordability. but interest rates now are actually LESS affordable. there was a very interesting example in the latest Economist: let's say you have a 10% interest loan, inflation is 8%, and you are in the 40% tax bracket. your real interest rate is a negative 2%. now let's say you have a 4% interest loan, inflation is 2%, and you are in the 40% tax bracket. now your real interest rate is a POSITIVE 0.4%. the thing to remember is that low interest rates forecast low nominal growth. this means two BAD things for all the people loading up on debt today: the market is forecasting that the real value of the debt will erode SLOWLY, while your ability to repay it will NOT increase quickly. whereas in the past, a given nominal debt was quickly diminished in real terms by inflation, even as your ability to repay it quickly increased thanks to the same inflation. thus housing is not more affordable in this environment. lending policies should be much stricter in times of high real rates like today, as compared to the low real rates of the past. unfortunately, the opposite has happened, and the result is the real estate bubble.

To: Mr. Sunshine who wrote (11066)	6/5/2003 8:11:14 AM
From: J. P.	Read Replies (1) \| Respond to of 306849

I don't think inflation or "normal" demand are driving prices higher right now. I think it's the GSE's. Banks and lenders like Countrywide can ad hoc lend money to anyone with a pulse with little risk. They shovel all the risk to FNM. FNM has privatized the gains, but has the implied backing of the U.S. Government, thus they get the upside, but pawn off the downside. Since normal risk/reward curves are thrown out the window, you have limitless cash and whole new drivers of demand: 1)Normally non-qualifying buyers (5% down loans, 50% of gross income payments, etc.) 2)Limitless money supply from FNM 3)Huge capital gain base to "roll up"