James Hamilton leaps to defend Ben Bernanke’s skepticism about housing bubbles. As a guy who bought a Northern Virginia home in 2000, I sure hope they’re right.
James Hamilton leaps to defend Ben Bernanke’s skepticism about housing bubbles. As a guy who bought a Northern Virginia home in 2000, I sure hope they’re right.
Jul 21 2005
The Wall Street Journal reports on a neuroeconomics experiment that compared emotionally-impaired investors with normal investors. The 15 brain-damaged participants that were the focus of the study had normal IQs, and the areas of their brains responsible for logic and cognitive reasoning were intact. But they had les...
Jul 20 2005
A while back, Tyler Cowen recommended Perry Mehrling's book on finance theorist Fischer Black. I read it while on vacation this past week. I strongly endorse Tyler's recommendation. Black co-developed a formula for option pricing which garnered a Nobel Prize, for which he was no longer eligible, having died before...
Jul 19 2005
James Hamilton leaps to defend Ben Bernanke's skepticism about housing bubbles. As a guy who bought a Northern Virginia home in 2000, I sure hope they're right.
READER COMMENTS
Michael H.
Jul 20 2005 at 6:47am
Hi Bryan
I understand that feeling perfectly, but it’s the guy who bought in 2005 that really needs to worry.
Phil
Jul 20 2005 at 9:24am
Bryan,
Why do you hope they’re right? Are you planning to move? Because, if you’re not, it doesn’t matter which way prices move, since you’re not selling anyway.
And if you *are* planning to move, lower prices benefit you only if you’re trading down. If you’re moving to a bigger house, you’re happy when prices drop, so your trade-up is cheaper.
From your comments, can we infer that you are planning to move to a smaller house sometime in the near future?
Michael H.
Jul 20 2005 at 10:05am
Phil:
There is something called “home equity” that is very nice to have. You can borrow lots and lots of money at low interest rates and deduct the interest on your taxes. That is no small thing.
Phil
Jul 20 2005 at 5:42pm
Michael H.,
Well, fair enough; I didn’t think of that since up here in Canada, mortgage interest isn’t tax deductible.
I should say, “are you planning to move or borrow money for other purposes?”
Still, a rise in house prices seems a high price to pay for access to credit, especially if you plan to upgrade. Suppose you want to buy a $30,000 car; the mortgage offers you a 4% rate, and the car dealer offers you 6%. Over four years, that’s a savings with the mortgage of about $1200 in interest, plus another $1200 in tax deductions (at a 50% tax rate), for a $2400 savings.
But if house prices rise, say, 10%, your upgrade from (what used to be) a $200K house to a $300K house costs you $110,000 instead of $100,000 — that is, an extra $10,000.
Why would you hope for a $10,000 hit to save $2400 in interest? Especially when the $2400 savings may not materialize — if you’ve paid off enough home equity, you may be able to borrow the $30,000 against your mortgage even if prices drop.
FWIW, I just bought a house myself … I’m hoping the value of this particular neighborhood rises relative to the rest, but hoping house prices stay the same or fall, as I am planning to upgrade within five to ten years. A continued increase will make me richer on paper, but poorer in the long term.
Jon
Jul 20 2005 at 5:44pm
And you can invest the money in low risk investments and get even lower rates and a tax bill to offset your interest deduction.
If you want rates of return greater than your mortgage rate you must take on the risk of negative returns.
For those thinking of taking out home equity to invest remember when you borrow you pay retail; when you invest you receive “wholesale”.
simon
Jul 20 2005 at 8:14pm
A key insight from this great blog is policy implications not motives … let’s focus on the facts and potential outcomes and leave motive for soap operas
Chris Bolts
Jul 21 2005 at 2:54pm
[quote]Why do you hope they’re right? Are you planning to move? Because, if you’re not, it doesn’t matter which way prices move, since you’re not selling anyway.[/quote]
A lot of people always say this, but they forget that not only is it entirely possible for a house to appreciate, it is entirely possible for a house to depreciate. And for those whose homes depreciate tend to be paying a whole lot of money for a house that isn’t netting them any return (even losing on the money that is being paid towards the balance of the mortgage). So yeah, you may have a house that you’re living in and may decide not to sell, but you’ll probably be kicking yourself in the butt for paying on a home that is eating away at your savings.
Comments are closed.