This Housing Bubble Will End Badly, Too [And you thought 2008 was horrible]

National Review ^ | 08/04/2015 | Kevin D. Williamson

[1010RD]

William’s numbers are off and he mixes statistics like a NYT’s economist, one that won a Nobel prize, not to mention the fact that all RE is local, but there is a RE bubble in this sense. People buy a payment. Interest rates and loan terms in payment years drive that payment.

Buying and selling a home is expensive and involves 8% of the sales price being reduced by the seller for those expenses. Buyers also face expenses, but often foolishly finance them into the loan.

The general rule of thumb is that for every 1% rise in interest rates the home value must be lowered 10-12% to maintain the same payment. Payment is derived from income and you’ll need to match the growth there to match any increase in real interest rates.

Real interest rates are the difference between inflation and the nominal inflation rate. A nominal rate of 20% with an inflation rate of 17% nets a real interest rate of 3%. A nominal rate of 3.5% (like now) less an inflation rate of .8% (2014s rate) is a real interest rate of 2.7%. That’s how the game is played.

The problem is that long term real interest rates are closer to 5.5% or nearly double. So where do housing prices go from here? Other than interest rates housing prices are driven by land costs, use costs (zoning/construction regulation) and cost of construction (labor/material) all of which cost money. Zoning and building issues that drag out the life of a project cost more, obviously. Most municipalities and states are adopting the International Building Code. That will normalize codes across the country. New building methods will continue to reduce labor/materials costs of construction.

Imagine the case where a new home can be built better, faster and cheaper than all the existing homes in a locale. That day is coming swiftly. What happens to housing prices then?

There is no reason that housing should be an appreciating asset in the above scenarios. SF, Seattle, Manhattan all have zoning and building restrictions that account for 40% or more of housing prices. Those are the exceptions.