Tuesday, September 27, 2005

More on housing

Angry Bear has an excellent post with great links on housing. The trigger for the post was a contrarian article by three economists who said that housing was not overvalued if appreciation continued at historic rates.

Just because it is a cheap trick to write an article at odds with conventional wisdom (e.g. "CEOs underpaid", "Americans save too much", and "Healthcare spending is too low") doesn't mean contrarian positions aren't worth considering. Everyone agrees that housing is more expensive now than it was 5-7 years ago. This must be because 1) housing was too cheap in the past or 2) housing is too expensive now. Certainly there were periods in time (in the US at least) where inflation meant that buying a house was way better than renting one, so purchasing has been undervalued at least in some moments in history.

An analagous phenomenon is the "equity risk premium", which is the gap between what stocks should be valued at and what they are actually valued at (historically stocks have been consistently underpriced on a risk adjusted basis. This gap is called the "equity risk premium" and economists have worked hard to explain it. It's also the basis for books like Stocks for the Long Run

Personally, I feel that housing is overvalued in general, and certainly overvalued when compared to renting. If the new prices are correct, then we'll see rents rise in the future and prices remain stable. If prices are too high, we'll see them fall, and rents remain stable. Either way, I see no upside in housing prices -- they can either remain grow inline with inflation (since they are now at the "correct" price) or they can fall. If they grow with inflation, there is no incentive to buy now. If they fall, there is an incentive to wait (and enjoy the too-low rents of today).


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