The Collected Works of Author and Blogger Larry Roberts

Archive for 2015

The cost of owning and the cost of renting in OC housing market is balanced. Unfortunately, neither one is affordable based on local incomes. I once wrote that Rental parity establishes the value of residential real estate, but others use different metrics to measure value and affordability. If the metric is price-to-income, today’s prices look inflated; if the metric is payment-to-income, today’s prices look undervalued. So which metric is correct? In my opinion, they both are. Over the short term, it’s impossible to ignore the payment-to-income ratio because it will establish the market equilibrium at any point in time; however, over the long term, it’s hard to ignore price-to-income because interest rates will revert to the mean, so the long-term…[READ MORE]

Rising interest rates will cause the US dollar to appreciate in value, making US real estate too expensive for foreign investors. When interest rates go up, the American consumer will find housing less affordable, and as a result, home sales volume will sputter, and lower home prices may follow. How will rising interest rates impact the Chinese real estate investor? Home sales to Chinese investors began slowing down early this year because the rise in the dollar relative to the Yuan made houses about 10% more expensive. Those that purchased before the dollar rose in value obtained a windfall, but the increased prices made US real estate less attractive to future buyers. If the federal reserve raises interest rates in…[READ MORE]

Since the mid 1990s, mortgage interest rates and home sales moved in opposite directions. Dodd-Frank made this inverse correlation even stronger. It's clear that rising interest rates do not boost home prices. Perhaps rising wages can offset the damage, but rising mortgage rates are never desired by realtors or existing homeowners. What's less discussed is that rising interest rates do not boost home sales either, and while homeowners aren't as concerned about that problem, realtors really hate it. Back in February of 2013 when mortgage rates were near record lows, I wrote that future housing markets would be very interest-rate sensitive, despite assurances to the contrary from most macro-economists. The prevailing economic view is that the housing market would respond…[READ MORE]

Ponzi schemes boost the economy through a flush of consumer spending with borrowed money. Unfortunately, Ponzi spending is not sustainable. Macro economists look for data correlations to infer causations for economic events; however, they often fail to investigate the individual incentives driving the herd behavior that shows up in their data. What I find amazing and amusing is the completely erroneous interpretations they conjure up without a clue as to the real cause. My favorite example is the notion of a wealth effect, first postulated by Carl Case and Robert Shiller. They noted that stock prices had little effect on people’s propensity to spend; however, house prices have a strong correlation to people’s spending habits. Economists noted that people spend…[READ MORE]

Nobody knows what will happen when the federal reserve finally raises interest rates, not even the federal reserve. Back in February I predicted the federal reserve would not raise interest rates in 2015. At each of the last four meetings, the pundits were increasingly certain the federal reserve would raise rates, and Yellen did not. This time, the usual suspects are even more certain. Will they be wrong again? The federal reserve is generally not a proactive entity, generally leaving rates low until forced to raise them reactively. Many influential economists, right or wrong, warn against any change in economic policy that might derail the economic expansion. The only reasons the federal reserve usually raises interest rates is a decline…[READ MORE]

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