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The Housing Bubble Is Back
Forbes ^ | 03/26/2013 | Karl Smith

Posted on 03/26/2013 8:30:22 AM PDT by SeekAndFind

Cullen Roche is worried that the trajectory of housing prices might deviate from what practical assumptions would predict.

"Real estate returns are not rocket science. Because they’re such a huge portion of the consumer balance sheet they tend to be tied very closely to wage growth. Wage growth, by definition, is very closely tied to the rate of inflation. That explains why the long-term historical return of real estate is roughly in-line with rate of inflation. But this survey from Zillow shows that real estate “investors” are probably still too optimistic."

I can see why these assumptions are attractive, but they are not quite what drops out of macroeconomic analysis.

Fundamental Upward Pressure of Prices

Wage growth, per se, shouldn’t drive housing prices. What we might expect is that wage growth drives rents and rents drive housing prices.

The wage-rent relationship, however, is not an iron law.

Matt Yglesias and Ryan Avent are famous for pointing out that rents – and hence housing prices – could be much lower in coastal cities if residents would abandon restrictive zoning laws. For example, Dallas and Philadelphia have roughly the same median household income, but home prices in Philly are much higher than in Dallas.

In general, if a fundamental driver – regulation, technology, preference – causes rents to eat up a higher portion of folks pay checks then rents and home prices will be higher.

To some extent the national rise in home prices is due to both technology and preferences driving more people to want to live in high rent areas like the Northeast Corridor.

Those same forces are leading some people to want to live in Houston, Austin and Raleigh-Durham, but because of looser regulation that simply translates into booming housing supply and a booming population rather than higher prices.

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TOPICS: Business/Economy; Culture/Society; News/Current Events
KEYWORDS: bubble; economy; homeprices; homesales; housing; housingbubble; mortgage; realestate

1 posted on 03/26/2013 8:30:22 AM PDT by SeekAndFind
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To: SeekAndFind

Take a look at real estate buying, it`s private equity mostly, aka real estate companies scooping up foreclosures and re-listing for almost double the purchase price.

It`s pure speculation right now. Peter Schiff says wait. In 5 years or so the DOW bubble being blown by the Fed and Govt. will pop and everything will be on sale.

2 posted on 03/26/2013 9:59:22 AM PDT by Para-Ord.45
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