Real Mortgage Rates
What is the Real Mortgage Rate?
At InflationData we are constantly talking about “real rates” typically by that we mean the inflation adjusted price. For instance we publish the inflation adjusted price of Oil, the inflation adjusted price of Gold, inflation adjusted stock prices and even the inflation adjusted cost of getting an education.
But today when we are talking about Real Mortgage Rates we are not talking simply about the inflation adjusted price of a mortgage. To calculate the real cost of your mortgage you must also take the appreciation of your house into account. So for example if your mortgage rate is 5% but your house appreciates 5% your real mortagage rate is zero. The formula for Real Mortgage Rate (excluding inflation) is mortgage rate (M) minus appreciation (A) equals Real Mortgage Rate (RMR) or M – A = RMR.
The Real Mortgage Rate and the Housing Bubble
Back in 2005 at the peak of the housing bubble housing prices were appreciating at what in hindsight were unsustainable levels. In those days, home prices were increasing at 17% per year.
So if 30 year mortgage rates were at 6%… the real cost of owning your home was 6% minus 17% appreciation or a negative 11%. In other words, by borrowing 6% you could net 11% profit on your home. No wonder people were buying houses like crazy. The real mortgage rate was -11%! Had the federal government not subsidized loans through Freddie and Fannie… mortgage rates would probably have risen in step with housing prices and there wouldn’t have been a bubble. Continue reading
Home Prices vs. Home Values
By Charles Vollum, BIG GOLD
On June 3, Standard and Poor’s issued the latest update to its Case-Shiller Home Price series.
The press release begins, “Data through March 2011 … show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010.”
Then comes the key statement: “Nationally, home prices are back to their mid-2002 levels.”
This means that on the average, a home in the U.S. that was purchased for $200,000 in mid-2002 would have sold for about the same price two months ago. So after owning the home for almost nine years, you could sell it and break even – no capital gain nor loss, and all of the cash you originally invested would be returned to you. Continue reading
The Housing Bubble Revisited
What really makes a bubble? Are bursting bubbles inflationary or deflationary? What lessons can we learn from history? In this article Justice Litle addresses these issues. ~editor
By Justice Litle, Editorial Director, Taipan Publishing Group
A burst housing bubble is a harbinger of deflation, not inflation, due to massive debts incurred and massive savings lost.
To really get your head around the inflation debate, it helps to understand the late great housing bubble. To that end, this description seems as informative as they come:
The smell of Boom was everywhere. It caught even those who were not particularly attracted by it. A former president of Freddie Mac, William Popejoy, arrived to head up a large savings and loan, American Savings. He had moved from the suburbs of Washington, D.C., “and we bought a four-bedroom house in Benedict Canyon for a hundred and sixty-five thousand dollars. We’d get over six hundred thousand for it now, in just five years.” If you could do that, without trying, what could you do if you were trying, if you were refinancing the first house and buying a second? “I own ten million dollars’ worth of houses,” said a thirty-year old actor… Money everywhere. The California dinner parties were all full of talk of overnight fortunes.
Yep. That captures the essence of the housing bubble all right. Home values zooming from $165K to $600K in “just five years”… goofball 30-year-olds buying millions of dollars’ worth of properties… dinner party talk of overnight wealth… Continue reading
Inflation and Housing Prices
Being “real tangible assets,” houses tend to act as inflation hedges. But in recent times they have appreciated by multiples of the inflation rate. This is due more to loose lending practices that to loose monetary policy. In the following article David Galland addresses the current state of housing prices and where they might be headed. ~editor
Should You Buy a House Now?
By David Galland, Managing Editor, The Casey Report
Recently, we have had a number of queries about real estate. And no wonder. For starters, real estate prices have come down. Plus, in an environment with next to zero interest rates, the idea of possibly picking up some income-producing property on the cheap holds a certain appeal to some. Then there’s the fact that real estate is very much a “tangible” – and so should hold up reasonably well, should the fiat currency system come undone, as we expect it will before this crisis is over.
The following, from reader and correspondent Ross, considers the issue of home buying from an interesting angle.
My wife and I have been considering buying/building a house for a while now. After long months of searching, we have had to ask ourselves about the “value” of a home. I say this because my parents in 1972 purchased a 2, 000 sq/ft home for $20,000. That was almost exactly what my father made per year at his job at the time of purchase. Is this ratio one to consider as a prudent homebuyer not trying to live beyond his means? I make about $150,000 a year and can’t imagine purchasing a house here in Pittsburgh for that price and being happy with that purchase.
My parents sold their home in 2001 for $180,000, which is obviously 9 times what they paid for it. We are looking at homes in the low 300s to purchase, and I can’t imagine the sales price in 30 years being 9 times that price, which would be $2.7 million! So do you see my line of thinking?
Could hyperinflation cause the price to “appreciate” that same way over time? Is inflation what caused my parents home to return 9 times what they paid for it? The reason I wrote to you regarding this topic is that I thought maybe there was a future missive buried in this line of thinking. Maybe not, but if you have time I would love to hear your thoughts on home purchasing at this time.
In response, I have to point out the obvious, that all real estate markets are Continue reading
Who Killed the Housing Market?
Wanted: Prime Suspect of Housing Market Murder
By Susan C. Walker, Elliott Wave International
October 8, 2007
Helen Mirren accepted her Emmy award for best actress in the mini-series, “Prime Suspect” with elegance and grace. Just the opposite of the tough detective superintendent character she plays who tracks down murder suspects in England. Who would Jane Tennison pick out as the prime suspect for the murder of the U.S. housing market and the resulting gruesome credit crunch? Continue reading
