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Wednesday, September 8, 2010
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42 comments:
So calculated risk put up an article talking about housing prices and interest rates. His premise is there is basically no relationship between the two interest rates vs. price
Personally I think he is dramatically over simplifying it. He mentions perhaps low interest rates cause a little extra demand, which raises prices. I personally think it gives a lot of extra demand, which causes prices to go up. My opinion of why interest rates have not shown a correlation to home prices is because of inflation. When interest rates were very high in the 1980s inflation was very high so home prices still went up, although less than inflation. If we escape Japan's fate and have an increase in interest rates without an increase in inflation I could see that being very bad for housing. I think likely high rates would come with inflation, but if people start to get worried that the US will default interest rates could go up with inflation at very low levels(like Greece).
I am not predicting interest rates will increase quickly, or they will increase without inflation. I just think that CR was oversimplifying the argument that interest rates have almost no impact on housing prices.
If he looked at home prices vs rent or home prices vs. income he would notice that housing prices were lower when rates were higher.
"HB said...I think likely high rates would come with inflation, but if people start to get worried that the US will default interest rates could go up with inflation at very low levels(like Greece)."
Thats the way I see it too HB. If inflation stays low, but interest rates rise because there is a large "default premium" attached to borrowers, then yes home prices will go down (both real and nominally).
However, if we have high inflation leading to high interest rates, then we will have the situation we had in the 1980s where, despite 11, 12 13% interest rates, home prices continued to rise in nominal terms (but were dropping in real terms).
Hb, I think he's oversimplifying it as well. He eluded to price stickiness being a factor, but there are essentially no controls on that model. People will buy what they can afford, but drastic shifts in interest rates won't show their full impact in the short run.
And what the Fed "should" try to do for the sake of the economy and unemployment (and I think/hope they will succeed) is get moderate (3-4%) inflation going while keeping interest rates low-ish (or lower than they "should" be), such that real prices drop, but nominal prices don't.
i've posted this before, but my 'theory' is that in a down market lower interest rates force bigger price cuts to make real differences on monthly payments.
OT - cara,
r u familiar with boston metro market?
Cara-
I agree that would be a good solution, but my guess is the fed will not be able to pull it off very well. I think they have been trying to manufacture inflation for a while, but have been failing pretty badly. Core inflation seems to be hitting all time lows almost every month.
MM wrote: "OT - cara, r u familiar with boston metro market?"
Long time lurker. I lived in Boston for 30 years prior to moving to DC a few years ago. What do you want to know?
- David
I think others have touched on this before, but it's not just inflation that needs to be manufactured - it's wage inflation. Inflation could go up all it wanted, but mortgages are approved based on the buyer's salary. I know the two are linked, but I would think there would be some delay in increased wages until more of the unemployed (who would be willing to work for less) have all gotten jobs.
MM,
marginally. I would say I'm familiar with parts of the area, not in enough depth to really comment on most of it. I've lived in Falmouth (the cape), Belmont (next to Watertown and Cambridge), Attleboro and Providence.
As far as what the market's doing there, all I've been doing is watching the CS index.
MM,
but if you want familiarity with rental prices I can give you that in spades.
re: inflation
I've long suspected the gov't of messing around with the CPI to keep SS and SSI adjustments on the low side. COLA affects alot of gov't spending.
Jeremy-
You can make the same case about inflation as you did with wage inflation. While there are a lot of unemployed people there is a lot of slack in the system so it is hard for prices to go up. I guess you could get inflation from a price shock in something like oil, which not be helpful. Other than a price shock it is very likely that wage growth and inflation would come together, because they are both based on the demand for goods needing to increase.
cara, John/David,
quick post before playing hooky at Nats park - best friend relocated to Chelmsford few months back still living with relatives, has two kids in grade school, and is contemplating renting an apt/condo for a year or two before buying. they own their out of state house which is currently rented out. what's the housing outlook in/near Chelmsford? i wish there's a Frankly equivalent site. btw she plans to rent on a budget of $1200 for 2br is that really possible?
MM,
That's a northern suburb, so I'm less familiar with that. But we rented a 2 bedroom town house for $1050/month in Attleboro a similar distance away. And it was a really nice, very well maintained place. So my strong guess is, outside the city that far, yes $1200 should get her a nice 2 bedroom place.
How about this for a bidding war? Lyon Village continues to be hot.
asking $1 mill., sold $1.2 mill
Ace:
Regarding the Lyon Village home, I came across this history on Redfin:
Sep 08, 2010 Sold (MLS) $1,201,000
Aug 10, 2010 Delisted -- --
Aug 05, 2010 Relisted -- --
Aug 05, 2010 Listed $999,900 --
Aug 05, 2010 Delisted -- --
Have you been following this house? Was it always listed at $990,900? Thanks.
These are Stephen Fuller's main charts. (Note: this is a pdf file.)
He regularly updates this presentation, but there are a bunch of new charts and he has increased the granularity of some of the older charts.
Hi, Mike, no, I just signed up for the franklmls.com alerts for a certain range in Arlington. So I don't know anything more about that particular house--sorry.
franklymls.com, that is.
Does anyone have any thoughts or anecdotes about living in the City of Falls Church? A friend asked me about it and I didn't know what to say. I never seem to meet people who grew up there.
Robert,
I bet Stephen Fuller never accounts for possible bad news like this:
Bethesda-based contracting giant Lockheed Martin announced Wednesday that more than 600 executives have taken the company up on an early-exit program that provides financial incentives in exchange for leaving.
Article
How do your friends at SAIC feel about job security?
TBW-
I think the city of Falls Church is pretty nice, but the part of Falls Church that is in Fairfax County is not nearly as nice. I personally do not like the 7 corners area (traffic is always bad there) so I wouldn't want to live near it, but I have several friends that like it
TBW,
Undoubtedly, storm clouds are gathering for the local economy. It's stunning how quickly sentiment has changed, politically. The last few months have been astounding. What happens in Washington is the beginning and end to home prices in NOVA. My prediction curve is flattening out.
housebuyer,
There is a significant difference between the southern part of Falls Church FFX Co. and the northern parts that are near McLean and west of Falls Church city. Of course, this is also reflected in housing prices.
Ace,
would you say this house is ridiculously overpriced or just modestly overpriced? i drove by it a few times and happened to click on it and was shocked by its $930K price tag, even though it's expanded and partially updated...
cara,
tks! yeah she'd prefer a TH but said it's hard to find in her area, and would be more expensive. great to know she should be able to find something nice within budget.
it didn't feel like that far from boston, only took us 20+ min to get to logan (tho on a Sun morning)
Ace,
while i think the (relatively) big lot has something to do with it, it's the new paradigm in Lyon Village - though houses on the fringe aren't in high demand commanding top dollars anymore.
MM, I'd say "modestly overpriced" judging mostly from the assessed value and the photos (looks out of date to me, i.e., work in every room is needed, though obviously some updating was done maybe 10-20 years ago). The kitchen is also very small for a home in this price range. We'll see, won't we?
MM, did you notice that they paid more for it in 2006 than the current asking price? Looks as if they're trying to avoid too big a haircut, but with transaction costs (assuming they and not an employer are paying them) good luck with that.
Also, the Alex. green house (with the kitchen people didn't like, and with an unusable garage crammed on the tiny lot) has gone off the market. I presume bank is foreclosing.
MM, re: Lyon Village, sure seems that way, though I am surprised that many assessed values there dropped last year. Must have been a lot of un-updated houses selling there in July 2008-June 2009 and distorting the apparent FMV.
Fred
Good point. I was talking about the southern part.
Fred & HB, from what I've seen of that area, I agree with Fred. I suspect the prices in the nicer areas are being kept down somewhat (i.e., they may be a relative bargain) because a lot of people seem to have a negative (relatively speaking) view of "Falls Church", thinking primarily of 7 Corners.
Also, people seem to have mixed views about Pimmit Hills, also in the northern part of Falls Church (FX).
http://franklymls.com/DC7396428
assessed 350K sells at 296K in 12days
i talked to a seniour guy in treasury labor day weekend he said his division was in a hiring freeze and had orders to cut budget 10%
i think the cuts from DoD may show up here
TBW - It's not surprising you don't meet many people who grew up in the City of Falls Church, since it's tiny (population around 10,000) and many people who live there moved to the area as adults.
Ace - People may have mixed views about Pimmit Hills, since it's not exactly an upscale area, but the little houses there move about as quickly as anything in FFX County. It has the advantage of being near 495 and Tysons, and having the most affordable SFHs in what's become a fairly attractive school pyramid (Westgate or Lemon Road/Kilmer/Marshall).
Marshall HS was also recently approved for a major renovation, around $100 million if I remember correctly.
MM,
It's on the "outer loop" of 495 so, by Boston standards it's "far", it is an easy straight shot to the airport though, which is also on the north-side though by the water. Since it's both convenient to Worchester and Boston, it's concievable it's more expensive than Attleboro (convenient to Providence and Boston). But yeah, she should be able to find something nice. I lucked out with the Pitas Construction Company in Attleboro that built, owned and maintained our townhouse rental complex. It was like the best advertisement they could have for their construction business. Our electricity bills (which was the only utility) were never more than $30 a month. Ah, I miss the Pitas.
cara,
i love boston. i told her i'd move there in a heartbeat if i could get a job. the best part is the beaches are only 30+ mins away, 45-min to enjoy the best Maine lobsters, and to top it off killington is just a 2-hr drive.
housebuyer said...
You can make the same case about inflation as you did with wage inflation. While there are a lot of unemployed people there is a lot of slack in the system so it is hard for prices to go up. I guess you could get inflation from a price shock in something like oil, which not be helpful. Other than a price shock it is very likely that wage growth and inflation would come together, because they are both based on the demand for goods needing to increase.
Just read this article on CNN and it reminded me of our inflation discussion: Cotton Prices Going Up
We can easily get price inflation without wage inflation since prices for most things are based on a global market. This is an example of the price shock you mentioned but for cotton. With all the development in India and China, I can only see oil and other energy and consumables costs going up in the future.
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