Here is the link to the transcript of the talk show with Rich Toscano – it is imperfect:
Blog Talk Radio with Rich Toscano
A summary of his comparison of home prices vs. local incomes, and prices vs. rents:
Well, you can’t — some people say, “Oh, it should be three times income or something.” It doesn’t really work that way because I’m just taking a per capita income like — well, I’ll tell you. I’ll answer the question.
The typical ratio has been about eight times per capita income.
The ratio is eight for what it’s worth, but it’s really not really worth anything, except to compare it to what it’s been in the past. So, right now — yeah now we’re much below — we’re about 7.3 or something like that and it was maybe 8.1 with historical — we’re roughly 10% below the historical price/income ratio.
We’re about 4% below the historical price-to-rent ratio. So, we’re in undervalue historically, not dramatically so, but we’re there, which is now, we just kind of might want to buy houses.
Rich also mentioned that he bought a house recently! He goes into detail about it here:
If this outlook is correct, as I believe it is, then today’s ultra-low rates make this an ideal time to take out a chunky 30-year fixed mortgage, and to sit back and let inflation hew away at the real value of the mortgage and the monthly payments over the years to come.
So, the missus and I went out looking for homes. We only found one in our price range, a single family house in Bay Park, that we thought was awesome enough to be a long-term home. So we made an offer, got a loan with as low a down payment as we could get away with, and have now re-joined the ranks of the titular Landed Poor.
I sat out an inflation-adjusted home price decline of almost 50%, and now I’m buying at a time when prices are cheaper than normal and monthly payments at 45% below their historical median. That’s close enough for me.
In the link Rich states that “There’s actually very little correlation between interest rates and home valuations”. Historically speaking, I’d agree.
However, dare I be so bold as to say “This time is different”? 😉
J6P now has no useful equity, which means any purchase has to be financed in it’s entirety. That puts pricing directly tied to income via the payment, which in turn is determined by rates. IMHO any significant rise in rates will have just as dramatic an effect pushing prices downward as the original drop in rates did in pushing prices skyward.
Thanks Jim,much appreciated.
Higher interest rates will have a negative initial impact imho but I still believe that Japan is our future for the next decade unless some major innovation changes completely the playing field.
Interest rates are controlled by the Fed and the bond markets are a complete joke.
Look for the Fed to signal low interest rates for the next 5 years. They have promised so till 2013, right? Where are the bond vigilantes?
Where are the bond vigilantes?
Europe for now.
casanova, have you ever read Taleb’s tale of the turkey?
Let’s also note that the previous 2013 estimate was revised to at least 2014 before rates might rise.
Late 2014. Three more years.
Europe is a currency user not a currency issuer like the US, UK , Japan etc.
The problem in Europe is that by joining the Euro the nations lost their monetary sovereignty and have to beg the ECB to buy their bonds.
They cant print their own euros. ECB is limited as to the amount of bonds they can buy by treaty.
Compare this with the Fed that buys the government debt for whatever quantity they please. Have you ever heard of a failed US bond auction?
There is a closer than 90% correlation between the Fed interest rate and the treasury yields.
Look it here how the fed controls the yield curve ant the very weak market influence.
Taleb has made some of the worst investment calls in recent history, especially by massively shorting US treasuries the last two years.
Sorry Jim for digressing from the real estate topic.
Taleb’s investment performance is irrelevant.
Google “Taleb Turkey” and read.
I know his turkey tale. His books are full of anecdotes mainly borrowed from previous thinkers with not much original material in them.
Even the black swan idea is not originally from Taleb. He just turned a white crow into a black swan, sounds more appealing to the wide public.
If you read most european philosophers / thinkers especially Montaigne, you know where his plagiarist ideas come from.
Even his turkey tale was copied from philosopher Betrand Russell who wrote it first more than 60years ago and came originally with the idea.
So,for someone who prides himself in educating the public about investment risk, I think his performance and recommendations are more than relevant and he has failed on both counts.
I don’t care where the story originated, the central theme holds true — one can be supremely confident that everything is absolutely wonderful right up until the day they get their heads chopped off. History reinforces that lesson again and again.
Anyone that believes the Fed can keep ZIRP going indefinitely is kidding themselves.
do you have some logical explanation as to why the fed cant keep ZIRP for 10 or 20 years?
Look at japan, 20 years and counting zirp is alive an kicking.