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Sat Jan 5th 14:05 PM | Rating: 0 0
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How Far Might Housing Prices Fall?

JBD,

You shouldn't include inflation in your discount rate because it will presumably affect house prices and rents in the same way (unless you're betting you know which one will grow faster).

I think the appropriate discount rate for rent is closer to the after-tax yield on treasuries, or even better, the yield on tax-free munis. Using munis to discount avoids having to make a rough tax adjustment. So this leads to a discount rate of about 3.75%, which gets you to a much higher reasonable range for a home. But what's missing? You can't forget maintenance and taxes. These depend on the location, but will surely decrease the fair value of a home. The security premium is idiosyncratic, but I think it's about 20 bps per year for me.
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