ARNOLD KLING
August 14, 2011
The Top Political Contributors
August 11, 2011
Gender and the New Commanding Heights
August 11, 2011
Jamie Galbraith Makes an Assumption
August 11, 2011
Macroeconometrics: The Science of Hubris
August 10, 2011
Real and Nominal Bond Yields
BRYAN CAPLAN
August 14, 2011
The Effect of Thumb Sucking on Income
August 12, 2011
The Voice of Cold, Hard Truth to All Would-Be Educators
August 12, 2011
Ability, Morality, and Prosperity: A Paper and a Report
August 11, 2011
The Theory of Time and Frittering
August 10, 2011
Male Variance and the Remnants of the Gender Gap
DAVID HENDERSON
August 9, 2011
Hayek in "Unbroken", Part Two
August 8, 2011
Hayek in "Unbroken"
August 5, 2011
James Bovard on the Peace Corps
August 4, 2011
Summers Way Off on FDR and 1941
August 3, 2011
The "Amazon" Tax
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The Economist's housing index has US home prices as only 10% above the long-term norm http://www.economist.com/printedition/displaystory.cfm?story_id=2736477
If true, that's hardly a bubble. It has housing bubbles in other parts of the world, like New Zealand.
Anecdotes about booming local housing prices -- e.g., up 100% in a year in the part of Manhattan where I am writing this -- do not translate into a bubble in the national market. Housing is not liquid or portable so local conditions can be far, far from the national average.
I doubt that Leamer's SF Bay is any more indicative of the national average than is my section of Manhattan.
Sorry, but how do you calculate the P/E ratio of a house? The price part I understand but what are a house's "earnings"?
-- Economic Neophyte
This is explained in Lerner's piece thusly: "...In the stock market, you calculate P/E by dividing a company's share price by its annual earnings per share.
In the housing market, you divide the price of a house by the annual rent it could fetch."
He is using apartment rent as a proxy for earnings. However, apartment and single family homes are generally substitute goods. Isn't that sort of like calculating the auto industry P/E using Harley Davidson earnings in the denominator? It might be an interesting number, but it doesn't necessarily tell you anything useful.
Arnold,
It would be the wrong time to buy, because of the low interest rates generating high pricing, except for the largesse of the national debt which will eventually bring higher rates of inflation. lgl
There is a mutual fund that shorts bonds. You can find it at www.profunds.com.
I have a couple of questions for the group:
I rent a condo in Boston, in a fashionable neighborhood. The unit *directly* above me is on sale. I calculate the p/e ratio of the place I'm living in as:
450,000 asking price for a nearly identical place (the unit above).
21,000 annual rent (what I'm paying)
- 1,750 property tax
- 1,200 Condo Fees (approx)
18,000 (approx) net earnings per year
That's a p/e ratio of 25.
Now, my questions are:
- Isn't this a more accurate measure of local p/e ratio's if I assume that my rent and my neighbors asking price are typical for facilities and location? (btw: I obviously don't believe my rent is significantly different than current rents, and I've seen other similar units in the building sell for about the same price as my neighbor is asking).
- What's wrong with my calculations?
- Is this high or low, ignoring rates of growth for rents and purchases?
What about the fact that a large number of home buyers are shifting to adjustable-rate mortgages? As Stephen Roach has noted, "...the ARMs portion of the dollar value of new mortgage origination exceeded 50% in May 2004, well in excess of the 20% share prevailing in early 2003."
Given that ARMs aren't fully tethered to long-term treasury yields, I am not so sure about your assertion that high housing prices mean yields on long-term treasurys must be too low. Clearly that is only part of the story.