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Broaden your perspective on falling housing prices

 
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RealEstateCafe



Joined: 11 Dec 2007
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Location: Cambridge, MA

PostPosted: Thu May 26, 2011 12:53 am GMT    Post subject: Broaden your perspective on falling housing prices Reply with quote

Broaden your perspective on falling housing prices
http://bit.ly/0500vs0511
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admin
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Joined: 14 Jul 2005
Posts: 1823
Location: Greater Boston

PostPosted: Thu May 26, 2011 3:04 pm GMT    Post subject: Reply with quote

Quote:
That question caused Boston Real Estate Now blogger Scott van Voorhis to draw a stark contrast between the median sales price of single-family homes in Greater Boston during the past month, $417,000 in April 2011 versus $250,000 in 2000.


That's a long enough time period that inflation is going to make a big difference. If you just looked at the nominal prices, you might conclude that prices have another 67% to fall just to get back to the already lofty dot-com prices. However, adjusting for inflation, it's only a 26% additional fall (I know - "only"). Some (most?) of that 26% is probably due to lower mortgage rates too. However, that's not a good thing since it underscores how current price levels are heavily dependent on extraordinarily low interest rates and suggests that maintenance of those rates is a single point of failure.

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balor123



Joined: 08 Mar 2008
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PostPosted: Thu May 26, 2011 11:40 pm GMT    Post subject: Reply with quote

Interestingly, most people I know seem to think that interest rates and loan limits have little to do with home prices and that no one buys based on them. Instead, they rely on history to make their predictions. I can't find any good comparisons however. Never have Americans been so leveraged with such low rates and high limits.
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admin
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PostPosted: Fri May 27, 2011 12:16 am GMT    Post subject: Reply with quote

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Interestingly, most people I know seem to think that interest rates and loan limits have little to do with home prices and that no one buys based on them.


Setting a purchase price independent of financing would probably be a vast improvement over what people do now, which is still just to look at the monthly payment. I wouldn't go so far as to say that ignoring the financing would be ideal since more leverage could be a good thing when inflation is high (e.g., the 1970s), but it would be a step up from now when people behave the opposite of what their financial self interest would dictate. For a comparison, just look at the difference between the price to income ratio and price to payment ratio for Boston below. The price to payment ratio looks far more consistent historically. The still high price to income ratio coupled with a perfectly typical payment to income ratio at present is a reflection of my point about super low rates being a single point of failure for the market.

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