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Every few months I check out the Case Schiller housing price index. They compare the inflation adjusted price of similar houses over time. The score of 100 was given in 2000, as a reference point. They average out the price of 20 major metropolitan areas and apply a score,comparing how much a house would cost relative to previous years.
The most recent score for June 2015, is 180.88. And in June 2005, it was 190.1. The real estate bubble burst in 2006.
What are your theories of why we are approaching inflation adjusted peak real estate bubble prices?
Mine is low supply (population increasing faster than new housing units), low interest rates, and improving economy.
Even in OC, home price now is still slightly lower than 2005 in nominal US $. Since 2005, US $ has lost 25% of its value. In addition, a 6% interest rate in 2005 compared to a 4% rate makes housing nowadays much more affordable. I am not saying it is cheap now.
For example, in 2005, with a $500k home and 20% down, the mortgage payment is $2400 in 2005 $. In 2015, it is $1910 in 2015 $ which is equivalent to $1433 in 2005 $. Today's payment is 40% smaller than it was in 2005. Since most people buy a house with financing, the interest rate is a very important factor.
Oh...I thought the chart was inflation adjusted. That's good. At least more people who bought at last peak can sell now that nominal prices are close to peak in some of the bubble areas.
Even in OC, home price now is still slightly lower than 2005 in nominal US $. Since 2005, US $ has lost 25% of its value. In addition, a 6% interest rate in 2005 compared to a 4% rate makes housing nowadays much more affordable. I am not saying it is cheap now.
For example, in 2005, with a $500k home and 20% down, the mortgage payment is $2400 in 2005 $. In 2015, it is $1910 in 2015 $ which is equivalent to $1433 in 2005 $. Today's payment is 40% smaller than it was in 2005. Since most people buy a house with financing, the interest rate is a very important factor.
But back in 2005, a lot of people didn't care about the full payment amount, since they were doing interest only loans and thought they'd just sell in a couple years for a big profit.
I and most people don't believe in this number from the govt. They are trying to reduce SS payment. 1.7% inflation average for the last ten years? I used 2.25% annual inflation, and I think I am conservative.
You can't really say they are wrong. You can say that if you remove housing and gas and fuel, that they are wrong. But do you know what the rate of inflation was for everything people purchase is? And what if you compare all of that to the changes in wages? I guess that would be interesting. An economic indicator based on the real world. I'd say inflation based on all cost and purchasing power is well above 25%. In other words, standard of living is falling. We are getting poorer. Not all of us though. But then that's why it's happening.
I'd say inflation based on all cost and purchasing power is well above 25%.
This is difficult to determine thanks to the wild fluctuations in home prices and interest rates over the past decade. By one measure, the cost of living has decreased substantially for people that either defaulted on large amounts of debt or purchased/refinanced with low interest rates. I don't believe you can marginalize this effect when tens of millions of households participated on one end or another.
CPI uses owner imputed rent, which doesn't directly account for the effects of the housing finance mess on an average budget. On one side you had people paying (or at least owing) far more per month than the imputed rent, and on the other they ended up paying far less. This swing happened over less than a decade, which is short enough time to render most models irrelevant.
Even in housing markets that recovered the most, the actual monthly outlay (fixed rate fully amortized) on a home is lower today than it was 8-10 years ago. Being a large part of an average household budget that ends up negating much of the actual inflation experienced by the household.
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