Arnold Kling  

Housing Bubble?

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Progressive Implications of So... Tax Breaks vs. Subsidies...

Jonathan McCarthy and Richard W. Peach, two economists at the New York Fed, agree with me that there is no housing bubble.


we see that the adjusted rent-to-price ratio is not at a level that suggests a home price bubble exists. Instead, the period when this ratio was quite low was in 2000, but the other factors in the market (including the strong income gains at that time) prevented prices from falling. With the subsequent decline in interest rates, the ratio is now at a level in the upper part of its historical range.

They make the case that high home prices are driven more by higher incomes and lower interest rates than by expectations of further price appreciation. Thanks to Steven Antler for the pointer.

For Discussion. The ex post rental cost of owner-occupied housing for the past five years has been quite low, because of house price appreciation. Assuming that going forward the rental cost returns to something more normal, what will be the consequences?


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COMMENTS (3 to date)
Lawrance George Lux writes:

Arnold,
You are talking higher mortgage interest rates here, which will bring down Housing price. The mortgage tax credit was a bad idea from the start, and did cause the Housing bubble. Income-earners could never afforded the higher Housing Price/Income without an artificial increase in basic Take-Home Income--the mortgage tax credit. The later is to the benefit of Realtors and Home-Sellers alone, as Mortgage-Holders with variable rates will find eventually. lgl

Bill writes:

The mortgage interest deduction is pure evil!

William Woodruff writes:

Do not forget the externalities of boomers retiring and downsizing !


Expect increasing interest rates to slow inflation of home prices, however not on a national basis.

Certain regions will be hit harder than others (non costal areas, not as hard as costal regions is my belief).

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