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

To: gpowell who wrote (16066)	1/16/2004 11:38:40 AM
From: GraceZ	Read Replies (2) \| Respond to of 306849

I challenge anyone to determine what component of the market price is due to irrational valuation by using price, or price trends alone – and this was Tradelite’s original assertion. You can't use price alone to determine proper valuation and that was my point to him. He seems to think that where ever the market takes the price that is the correct valuation, that it's not possible for housing to be under or over valued. I believe it is possible by separating out the two aspects of housing, one the dwelling, the other the investment aspect. The dwelling aspect can be compared to the rental market and the investment aspect can be compared to investments of similar risk. When rents are significantly below ownership that means you are paying a fairly high premium in protection from rental rate inflation but also you may hope to regain that in capital appreciation. If I can rent and take the difference and invest it somewhere else with a much higher expected rate of return at the same risk than I can say that housing is over valued. Tradelite may think that people don't make these kinds of rational decisions, but they do them all the time. But people are subject to price movement on the up side as much as the downside. If you have a movement in price like we've seen recently in the real estate market people start expecting that the above average trend will continue or at worst, return to historic trends. I think it would be rare to sit down at the settlement table with a buyer who thought that the house they just bought can go down in price even though we've been through several periods where home prices did exactly that after above average moves up. Home prices are subject to changes in real income as well as interest rates. When they get ahead of the rate that real income is growing you can expect that they will revert to the mean. That said they can maintain above average rates of price appreciation for much longer than most think is reasonable. Especially so when speculators get involved in the market.