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Buy! Buy!

Cardinal Collective takes Professor Delong's advice and looks at the ratio of rents to mortgage payments and finds that there's nothing unusual going on. We're arguably on the high side, but well within the normal range thanks to low interest rates. If interest rates change does something bad happen? Probably, but bad things will happen across the board, so I don't know that this is anything in particular to worry about.

December 22, 2004 | Permalink


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"And remember, real estate's a local game, not a national one, so every market is different."

So maybe there's no bubble in Texas?

I don't find this very reassuring about the situation in California/Nevada.

Posted by: liberal elitist | Dec 22, 2004 7:23:46 PM

but bad things will happen across the board,

Not really. The selling prices of homes will be subject to much more pressure than rents.

Home prices in most markets have just about topped out based upon "affordable monthly payments". There is no room for mortgage interest hikes.

Rents, on the other hand, will only see pressure from a rising pool of renters who will not be buying houses. However, the potential deflationary pressures of dropping purchase prices might just offest this.

Stagnation in the average housing price has begun in many markets. Look for it to expand nationwide when 15 year mortgages jump to 8% or higher.

(The relationship between long term interest rates and the much ballyhooed prime rate is worthy of several textbooks. In the short term it can be unpredictable, but when the fed raises the prime over time, rates will go up. When? is the question.)

Posted by: def | Dec 22, 2004 7:30:48 PM

For the big East Coast cities I've lived in with a pretty constant market for a limited supply of urban housing, my experience the past decade has been: if you know you want to be some place at least three years, and you are already going to be paying rent, I would buy. With a few exceptions [midwest and south seems to be exceptions -- more housing supply than demand]. The price will probably appreciate but even if it doesn't, you get a tax write-off and you would have been paying some significant amount anyhow in rent with nothing to show for it. And one often ends up staying many years longer than the two or three you thought, which gives more years for appreciation. Financially, it's the best decision I ever made. Far better than the stock market!

Posted by: Anonymous | Dec 22, 2004 8:18:16 PM

Now that's the kinda news a logan circle condo owner likes to hear!

Posted by: fnook | Dec 22, 2004 8:45:21 PM

The homeowners who will be hit hardest and quickest if long rates go up rapidly are people one 1-year ARMs and, more important, people with floating rate home equity loans (which have grown enormously).

Posted by: howard | Dec 22, 2004 9:21:19 PM

I'd be curious to hear what Delong was saying back in the late 1990s, at the height of the dot com bubble.

Posted by: Robert | Dec 22, 2004 10:49:03 PM

Don't overlook the de facto "price support" provided by growth management (which slows the growth of supply.)

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I'd be curious to hear what Delong was saying back in the late 1990s, at the height of the dot com bubble.

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