DonPaul Olshove

How Ivory Tower Economists Created the Housing Bubble

For Keithp -

Yes, this article leaves out a great deal and still is too long. Yes, all RE is local, but the total aggregate demand for our nation is pretty fixed. Those people leaving one area simply boost demand (and rents/prices) in the area they move to. In a stable, nationwide RE market, these forces will balance out as capital flows from one area to another. If the gov would track the aggregate national demand and resulting prices properly it would solve many problems.

Another related and very important factor that is not adequately addressed in the above discussion is that all RE is continuously depreciating and must be replaced on a regular basis. I make the rate of actual physical depreciation to be about 2%/year. In other words, about 2% of the housing in any stable area will need to be rebuilt every year. Of course, much of this building is maintenance of existing building. Nevertheless, as a consequence of the ongoing depreciation, even those areas are depressed by jobs and people that have left the area will eventually recover to the cost of construction for housing in that particular area. - If you can wait that long. In a truly stable housing market, the cost of construction is the dominate controlling factor. You can't get too much above this or builders simply build more houses. You can't get too much below this because existing houses are continuously evaporating and the supply of houses eventually falls to meet the demand.

For dckleins -

I am not familiar with the Chicago area RE market, but I would guess that the details of RE returns/losses for the next couple years are going to be dominated by market swings, and you should probably not base your decision on a calculation that begins by assuming stability. The immediate future may turn out be a grand opportunity to nail down a big chunk of equity that you can take with you when you leave Chicago depending on what programs the gov offers to home buyers. One things sure, the gov is not going to let the whole economy go down in flames, so easy money (general inflation) seems guaranteed at this point and house prices will not be allowed to decrease dramatically. I hope you allow for a big enough inflation number in your model. Gold prices tell you what others are expecting. A person's personal residence makes a better real asset holding than gold.

That said, I would also suggest that many people come out ahead by owning a house because it is an enforced savings plan so they don't end up spending the money they could have invested elsewhere.

In any case, this is a complex investment that is unique to each buyer and each property. Any local property market will contain many houses distributed on a bell curve of pricing. This is not like a stock where every share is exactly the same as every other share. You can't slap a coat of paint on your GE shares and get a higher price for them. It is entirely possible to buy a particular house low and sell it high even though the nominal prices are unchanged simply by mowing the lawn and cleaning the kitchen and bathrooms. This can be greatly amplified by serious personal efforts put into what is commonly called "sweat equity."

For Analyst -

Yes, the price of everything other than houses will increase until this equation is back in balance. Whether this is at the current level of house prices, the lower 2001 prices, or the much higher 2006 level is yet to be seen. In order to bail out the most extreme cases I see would require a level of money creation that, in itself, would crash the economy. I think the gov is smarter than that, but you never know. Some of us still remember the 70s. Not fun.