We've hit bottom in the housing market

In case you haven't noticed the efficient markets hypothesis has been proven false.

That means, at least occasionally, there are $100 bills lying all over the place to be picked up by those savvy enough to notice.

If you've read Robert Shiller's books and papers, studied the data, you would recognize that RIGHT NOW is one of those times: We've hit bottom in the housing market. Yes, housing prices are predictable. The price to rent ratio isn't bad. Not bad at all. And it's much better given today's remarkably low interest rates.

If you are a first-time buyer now is a ridiculously good time to buy because the government will give you $8000 on top of the already good deal that is the current housing market.

It's a little harder if you're an investor because interest rates are not as advertised: few banks are lending to investors and the terms are pretty ugly. Expect a higher interest rates and 3 to 4 points origination fees, even if you're buying an under-priced foreclosure, putting 25% down and have 800+ credit scores.

If you're paying with cash you can find properties with a 10 to 1 price to rent ratio. Easy. At least in markets I know well. That means a conservative estimate right now is that these properties will earn a 10% real return over the long run. That's insanely high given long-run inflation indexed bonds pay 1-2%. This is a risk premium to put all risk premiums to shame.

So if you have cash and a little patience, go buy a house. Ten years from now you'll be very happy you did.

But before you do as I suggest, be sure to read my disclaimer.


  1. I have been very negative about the housing market since 2004 but I now agree that houses are the cheapest they have been decades in some area. The crucial phrase in the last sentence is "some areas". In central California cities, which have some of the highest foreclosure rates in the country, prices have crashed to bargain levels. But this is not true in coastal California. Housing is not an efficient market and sellers only gradually drop prices.

    The problem I have with your post is your reference to "today's remarkably low interest rates" as an explanation of why current prices are a good deal. Shouldn't housing, a real asset be dependent on real interest rates not nominal interest rates? Currently nominal rates are very low but real rates are about average.

  2. Hi Anonymous:

    Thanks for your comment. Depending on how you measure anticipated inflation, you're right, real rates aren't that low, albeit lower than they were before the housing boom when inflation indexed bonds were getting 4 percent plus inflation.

    Two buts: (1) I think the Fed will try very hard to keep inflation positive and possibly a bit above 2 percent. Some have said this explicitly. After all, it is Bernanke's Fed and his writings, among many others, would suggest that in times like now targeting inflation is the right thing to do. So, looking long term (which I am) it's hard to believe inflation will be much less than is has been historically. That would mean long-term real rates, like the nominal rates, are very low.

    (2) Some believe big-time inflation is right around the corner. For the record, I don't believe the risk of this is high. But if you believe the likes of John Taylor and some other conservative economists, then even higher inflation rates are possible, which would make today's real rates a true bargain.


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