Saturday, December 06, 2008

Maybe it is time to buy

“The Changing Prospects for Building Home Equity,”[PDF] tries to predict where today’s first-time buyers in the 100 biggest metropolitan areas may actually have less home equity by 2012 as a result of continued price declines. The verdict was that buyers in 33 of the markets could see a decline by 2012, including potential six-figure drops on an average home in the New York City, Los Angeles, San Francisco and Seattle metropolitan areas.

It may be, actually, a good time to buy a house. I think yesterday, I realized that hyperinflationary policies -- where you lose a lot of money by not lending or investing -- are a tack the Obama Administration may very well try to get the credit markets unfrozen.

Say you buy a $500K house that has some platonic, abstract value of $250K in a universe where housing prices are tied to rents and incomes. After 5 years of 15 % inflation, you haven't lost anything -- you have a $500K house again. If you have a 15 year morgage, ten years later you own a $2M house. While it seems like you've made nothing in real terms, if you've only been paying 4.5% on this, you're golden.

Update: I also wanted to comment on this in the column itself, [A]s it does with the stock market, the [bottom to the housing market] will probably arrive when everyone is feeling the most pessimistic. I hear this sort of thing now and then. Isn't that kind of stupid? Not only is pessimism harder to measure than even prices, but you can always get more pessimistic -- prices have a soft bottom at 0 (you could pay people to take stuff away, which is why I don't say 'hard bottom'), but I don't think pessimism is even strictly a scalar quantity. The statement is an implicit suggestion that you replace your inability to predict the shape of a hard-to-measure trend with your inability to predict the shape of a harder-to-measure-and-hard-even-to-define trend. I don't see what you gain.


nephos said...

Don't you need to consider also inflationary swings over the life of the mortgage?

An interesting example is looking at US inflation around WW1: Inflation skyrocketed at the end of the war as the US invested in sending its work force toward futile engagement in the trenches. And then deflation skyrocketed once they came home. The average over this period was probably somewhere in the vicinity of something small.

Hmmm, maybe you can time these cycles according to your astute calculations of the norm of the optimism tensor

mark said...

Time to build a cabin and invest in a mountain-based business too?

By the way, hurricane season is over, is it not?

Rionn Fears Malechem said...

You're trying to make me do research. I don't even know what they used for CPI over World War I. But, if prices rose 20 % a year for 4 years, and fell 2 % for one, then prices would be... higher. It all depends on what the numbers are.

I'm feeling pretty optimistic, and think we're really more than a decade from needing our mountain demesnes.
Hurricane seasons are like recessions -- you don't know they're over until some time after. November 30th has passed, so the nominal hurricane season is over. But, if a hurricane -- or even a tropical cyclone -- kicks up in the next three weeks, then no. The NHC has already posted a summary, however.

nephos said...

Inflation stats

So I don't know why it's been different in the past 50 years, but historically at least, there have been wild, roughly compensating swings.

I do research so you don't have to.