Re: Interest rates and housing
Are you saying that there's a real cycle of real estate that takes 18 years from (from peak to peak or from peak to trough?)? David That is the usual cycle, although there are exceptions. That seems different from your initial contention that the current bubble has been caused by monetary growth. My contention is that there are two causes, monetary and real (including fiscal), and the causes are complementary. The timing of the cycle is inherent in the nature of the real estate market for rentals and construction. then do you predict a collapse of real estate prices based on monetary or real factors, or both? Both Fred
Re: Interest rates and housing
If the real estate cycle is based on government expansion of money, David It is based on that and also on fiscal policy and the inherent nature of real estate rentals and construction. why has it been the same under three or four different monetary systems? It does not matter much to the economy why there is a monetary expansion. In the 1830s the expansion was caused by the state control of banks, including the prohibition of branch banking, and with banks having to buy state bonds, and excessively issuing currency. The effect was similar to today's expansion of money by the Fed. It's essentially the Austrian-school business cycle, with the higher-order capital goods consisting of real estate construction. See my paper referenced in the cycle table for further explanation. Fred
Re: Interest rates and housing
In a message dated 8/16/05 10:24:56 AM, [EMAIL PROTECTED] writes: The last real estate bottom was in 1990, so if this is another 18-year cycle, the next depression would be around 2008. So far, the economy is tracking the cycle right on schedule. In my judgment, the economy is entering the plateau stage. Heh, Fred, I guess you are the only armchair economist left. If government has causes a real estate price bubble by artificially loweringn interest rates, how can it have an 18-year cycle, and why would it be the same under the federal serve system as it was under free banking or the period from the Civil War to the establishment of the Fed? Why does the money go into residential real estate and not into stocks or automobiles or other assets? Thanks, David
Re: Interest rates and housing
Hopefully others on Armchair are on vacation and not permanently gone. I find these exchanges fascinating and often helpful. From: ArmChair List [mailto:[EMAIL PROTECTED] On Behalf Of [EMAIL PROTECTED] Sent: Thursday, August 18, 2005 3:57 AM To: ARMCHAIR-L@mail04.GMU.EDU Subject: Re: Interest rates and housing In a message dated 8/16/05 10:24:56 AM, [EMAIL PROTECTED] writes: The last real estate bottom was in 1990, so if this is another 18-year cycle, the next depression would be around 2008. So far, the economy is tracking the cycle right on schedule. In my judgment, the economy is entering the plateau stage. Heh, Fred, I guess you are the only armchair economist left. If government has causes a real estate price bubble by artificially loweringn interest rates, how can it have an 18-year cycle, and why would it be the same under the federal serve system as it was under free banking or the period from the Civil War to the establishment of the Fed? Why does the money go into residential real estate and not into stocks or automobiles or other assets? Thanks, David
Re: Interest rates and housing
If government has caused a real estate price bubble by artificially lowering interest rates, how can it have an 18-year cycle, David Because real estate construction takes years, and recovery from a downturn takes years. An exception is an inflationary boom that is not a real economic recovery, such as the stagflation of the 1970s. That's why there was a real estate peak in 1979. Why does the money go into residential real estate and not into stocks or automobiles or other assets? The money goes into all real estate, not just residential. Of course it also goes into stocks, as with the tech boom of the 1990s, followed by the downturn of 2001, which was not caused by real estate. But the real-estate boom prevented the 2001 recession from becoming major. The big depressions have all followed real estate booms. Fred
Re: Interest rates and housing
In a message dated 8/18/05 11:28:53 AM, [EMAIL PROTECTED] writes: --- Technotranscendence [EMAIL PROTECTED] wrote: there are political cycles too, such as the Presidential cycle. Yet this doesn't line up with 18-years. Yes, there several cycles going on at the same time. There are also random shocks. The 2001 downturn was not caused by real estate, for example. But some have more impact than others, and my analysis of historic cycles indicates that the real estate cycle is the most economically significant one. Fred Foldvary Fred, If the real estate cycle is based on government expansion of money, why does it have an 18-year cycle, any why has it been the same under three or four different monetary systems? David
Re: Interest rates and housing
In a message dated 8/18/05 11:40:59 AM, [EMAIL PROTECTED] writes: If government has caused a real estate price bubble by artificially lowering interest rates, how can it have an 18-year cycle, David Because real estate construction takes years, and recovery from a downturn takes years. An exception is an inflationary boom that is not a real economic recovery, such as the stagflation of the 1970s. That's why there was a real estate peak in 1979. Why does the money go into residential real estate and not into stocks or automobiles or other assets? The money goes into all real estate, not just residential. Of course it also goes into stocks, as with the tech boom of the 1990s, followed by the downturn of 2001, which was not caused by real estate. But the real-estate boom prevented the 2001 recession from becoming major. The big depressions have all followed real estate booms. Fred I don't follow you. Are you saying that there's a real cycle of real estate that takes 18 years from (from peak to peak or from peak to trough?)? That seems different from your initial contention that the current bubble has been caused by monetary growth. Are you saying both things? If so, then do you predict a collapse of real estate prices based on monetary or real factors, or both? David
Interest rates and housing
Are there any armchair economists left? If so, what do you think of the following article? Thanks! David Levenstam George Mason University - Interest rates and housing Bruce Bartlett (archive) August 16, 2005 | Print | Recommend to a friend Last week the Federal Reserve again raised the federal funds interest rate, which now stands at 3.5 percent. When the Fed began tightening monetary policy in June 2004, this rate stood at just 1 percent. Thus far, there is little evidence that the Fed's actions have had any effect either on financial markets or the real economy. Market interest rates, especially for mortgages, remain low, and economic growth continues at a steady, if unspectacular, pace. Given the Fed's actions, economists would have expected interest rates to be higher and growth to be slower. The Fed calls the lack of impact a "conundrum." As a consequence, some analysts are saying that the Fed will have to raise the fed funds rate higher than it originally planned. A majority of forecasters in the Wall Street Journal's latest survey expect it to hit 4.5 percent before the Fed stops. Economists at Goldman Sachs are predicting five percent. The problem is that just because the Fed is raising rates gradually doesn't mean that the impact will be gradual. It could come quite abruptly. Think of a balloon. Whether you blow it up slowly or fast, at some point, it is still going to burst. The same thing oftentimes occurs with monetary policy. It may appear that nothing is going on for a long time and then, suddenly, something dramatic happens to show that monetary policy is working as expected. Another problem is that the Fed's policies always take time before they impact, and these lags vary. So it's very difficult to know precisely when the impact will be felt. Generally speaking, when the Fed tightens, the impact on the economy is symmetrical. That is, whatever sectors went up the most during the easing phase will fall the hardest when it tightens. Stocks went up most during the easing cycle from 1995 to 1998 and fell the most after the Fed tightened in 1999 and 2000. In the latest easing phase, which began in January 2001, the principal impact has been on housing. Over the last five years, housing prices nationally have risen by just over 50 percent. But in some areas, prices have risen much more. Those in California and the District of Columbia are up over 100 percent. Twelve other states have seen increases of over 60 percent. All except Nevada border either the Atlantic or Pacific oceans. However, much of the country has not seen significant housing price increases -- in 32 states they have risen less than the national average. In Utah, prices have gone up just 17.5 percent in the last five years -- little more than the 12.8 percent increase in the Consumer Price Index. Other laggards include Indiana (19.8 percent), Mississippi and Nebraska (both 21.8 percent). Almost all of the below average states are in the nation's heartland. In a recent speech, Federal Reserve Bank of San Francisco president Janet Yellen noted that the ratio of home prices to rents is about 25 percent above its long-term average. In Los Angeles and San Francisco, the ratio is 40 percent above normal. Experience shows that prices will either level off or fall when this is the case, bringing the ratio back to trend. One thing that may be different this time is that the abnormal price-to-rent ratio is being driven partially by falling rents, not just rising home prices. This is because investors are purchasing so many properties in hopes of rapid appreciation, increasing the supply of rental housing. And since much of this real estate has been purchased with interest-only or negative-amortization loans, investors don't need much rent to cover their payments. Negative-amortization loans are especially dangerous, both for borrowers and those making such loans. This type of loan is a bit like a credit card, where the full amount need not be paid every month. As long as a small minimum payment is made, the balance can be rolled over. In this case, the unpaid balance is added to the outstanding mortgage. This reduces one's cash flow expense, but also reduces one's profit at the back end when the property is sold. So unless prices rise fairly rapidly, one can easily get into a situation where the mortgage is greater than what one can clear at closing. Consequently, even if prices simply level off, a lot of investors may find themselves with mortgages they cannot pay back after a sale. Owning one's own home is still the best investment that anyone can make. And if you plan to stay put for a few years, you shouldn't worry about a bust in the housing market. But those buying investment properties on either coast should be very, very careful. It may take a lot longer than they think to make money and they should be sufficiently well capitalized to ride out a market di
