Hamilton on Bernanke on Bubbles

Hi Bryan
I understand that feeling perfectly, but it's the guy who bought in 2005 that really needs to worry.

Bryan,

Why do you hope they're right? Are you planning to move? Because, if you're not, it doesn't matter which way prices move, since you're not selling anyway.

And if you *are* planning to move, lower prices benefit you only if you're trading down. If you're moving to a bigger house, you're happy when prices drop, so your trade-up is cheaper.

From your comments, can we infer that you are planning to move to a smaller house sometime in the near future?

Why do you hope they're right? Are you planning to move? Because, if you're not, it doesn't matter which way prices move, since you're not selling anyway.

Phil:
There is something called "home equity" that is very nice to have. You can borrow lots and lots of money at low interest rates and deduct the interest on your taxes. That is no small thing.

Michael H.,

Well, fair enough; I didn't think of that since up here in Canada, mortgage interest isn't tax deductible.

I should say, "are you planning to move or borrow money for other purposes?"

Still, a rise in house prices seems a high price to pay for access to credit, especially if you plan to upgrade. Suppose you want to buy a $30,000 car; the mortgage offers you a 4% rate, and the car dealer offers you 6%. Over four years, that's a savings with the mortgage of about $1200 in interest, plus another $1200 in tax deductions (at a 50% tax rate), for a $2400 savings.

But if house prices rise, say, 10%, your upgrade from (what used to be) a $200K house to a $300K house costs you $110,000 instead of $100,000 -- that is, an extra $10,000.

Why would you hope for a $10,000 hit to save $2400 in interest? Especially when the $2400 savings may not materialize -- if you've paid off enough home equity, you may be able to borrow the $30,000 against your mortgage even if prices drop.

FWIW, I just bought a house myself ... I'm hoping the value of this particular neighborhood rises relative to the rest, but hoping house prices stay the same or fall, as I am planning to upgrade within five to ten years. A continued increase will make me richer on paper, but poorer in the long term.

And you can invest the money in low risk investments and get even lower rates and a tax bill to offset your interest deduction.

If you want rates of return greater than your mortgage rate you must take on the risk of negative returns.

For those thinking of taking out home equity to invest remember when you borrow you pay retail; when you invest you receive "wholesale".

A key insight from this great blog is policy implications not motives ... let's focus on the facts and potential outcomes and leave motive for soap operas

[quote]Why do you hope they're right? Are you planning to move? Because, if you're not, it doesn't matter which way prices move, since you're not selling anyway.[/quote]

A lot of people always say this, but they forget that not only is it entirely possible for a house to appreciate, it is entirely possible for a house to depreciate. And for those whose homes depreciate tend to be paying a whole lot of money for a house that isn't netting them any return (even losing on the money that is being paid towards the balance of the mortgage). So yeah, you may have a house that you're living in and may decide not to sell, but you'll probably be kicking yourself in the butt for paying on a home that is eating away at your savings.