3 ms·

Rent, in an arbitrage free economy, should be exactly equal to the interest on the mortgage plus wear and tear on the house.

by ouid 9y ago

KillerRabbitt 9y ago
There is an old story about a financial economist and passionate defender of the efficient markets hypothesis (EMH) who was walking down the street with a friend. The friend stops and says, "Look, there is a $20 bill on the ground!" The economist turns and coolly replies, "Can't be. If there was a $20 bill on the ground, somebody would have already picked it up."
- ouid 9y ago
  I realize I'm analyzing a joke, but dollars on the street aren't assumed to exist in an arbitrage free economy because there aren't enough actors. The joke isn't saying that the theory is wrong, it's saying that the economist is wrong for applying it. In the case of housing markets, if anyone can borrow money to buy a house for less than they can make on renting that house, then there are enough people alive that they will do that. Also, I should mention that this is the zero arbitrage principle and not the efficient market hypothesis. The efficient market hypothesis asserts that everything we know about the future value of a house is reflected in the current price of the house, which is also relevant to the discussion, but not what I was referring to.
sokoloff 9y ago
Plus the property taxes, insurance, and cost of capital for the downpayment.
- greglindahl 9y ago
  And the cost of risk, which is partly covered by insurance, which costs money.
dqpb 9y ago
You would still have supply and demand dynamics in an arbitrage free economy. If there is too much supply, no one's going to care what your mortgage is.
- ouid 9y ago
  Too much supply, housing prices go down, interest on the housing prices goes down, rent goes down. Equality is maintained.
IncRnd 9y ago
Plus principal, taxes, insurance, profit for homeowner, percentage for property manager, renter deposits, upkeep from the last renters who broke the gas lines, scratched your hardwood floors and fled, etc. You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs.
- thaumasiotes 9y ago
  > You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs. That is true as to costs imposed by the renter (breaking the gas lines / scratching the floor), but completely false as to costs the landlord has to pay regardless. It doesn't matter what the property taxes are; the landlord will rent to you if he makes more money by renting than he would by not renting. If your rent doesn't cover his property taxes, then it sucks to be him - both of those quantities are negative, but you can still rent from him.

Rent, in an arbitrage free economy, should be exactly equal to the interest on the mortgage plus wear and tear on the house.

by ouid 9y ago

Rent, in an arbitrage free economy, should be exactly equal to the interest on the mortgage plus wear and tear on the house.

KillerRabbitt 9y ago

There is an old story about a financial economist and passionate defender of the efficient markets hypothesis (EMH) who was walking down the street with a friend. The friend stops and says, "Look, there is a $20 bill on the ground!" The economist turns and coolly replies, "Can't be. If there was a $20 bill on the ground, somebody would have already picked it up."

ouid 9y ago
I realize I'm analyzing a joke, but dollars on the street aren't assumed to exist in an arbitrage free economy because there aren't enough actors. The joke isn't saying that the theory is wrong, it's saying that the economist is wrong for applying it. In the case of housing markets, if anyone can borrow money to buy a house for less than they can make on renting that house, then there are enough people alive that they will do that. Also, I should mention that this is the zero arbitrage principle and not the efficient market hypothesis. The efficient market hypothesis asserts that everything we know about the future value of a house is reflected in the current price of the house, which is also relevant to the discussion, but not what I was referring to.

sokoloff 9y ago

Plus the property taxes, insurance, and cost of capital for the downpayment.

greglindahl 9y ago
And the cost of risk, which is partly covered by insurance, which costs money.

dqpb 9y ago

You would still have supply and demand dynamics in an arbitrage free economy. If there is too much supply, no one's going to care what your mortgage is.

ouid 9y ago
Too much supply, housing prices go down, interest on the housing prices goes down, rent goes down. Equality is maintained.

IncRnd 9y ago

Plus principal, taxes, insurance, profit for homeowner, percentage for property manager, renter deposits, upkeep from the last renters who broke the gas lines, scratched your hardwood floors and fled, etc. You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs.

thaumasiotes 9y ago
> You're going to have a tough time finding a homeowner who will let you live in their house for less than their costs. That is true as to costs imposed by the renter (breaking the gas lines / scratching the floor), but completely false as to costs the landlord has to pay regardless. It doesn't matter what the property taxes are; the landlord will rent to you if he makes more money by renting than he would by not renting. If your rent doesn't cover his property taxes, then it sucks to be him - both of those quantities are negative, but you can still rent from him.