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>prices tend to increase because good land is scarce in most places people want to live. Prices are driven by demand. A crash will inevitably reduce demand.
by ra1n85 8y ago
>prices tend to increase because good land is scarce in most places people want to live.
Prices are driven by demand. A crash will inevitably reduce demand. Just like equities, real estate involves speculation. It may not be as bad as 2008, but we will still see a significant drop in real estate prices.
- jeffreyrogers 8y agoI don't think this analysis tells the whole story because it doesn't explain where the crash would come from. Demand is high (and likely to remain high) because good land is scarce. Developers can't create large amounts of new housing because of zoning and also because if they create too much they won't be able to make a profit (they take out loans to finance their projects too). So supply is likely to be less than demand for the foreseeable future in most locations. Supply could increase rapidly if the mortgage delinquency rate rises rapidly. There aren't signs of this happening soon that I'm aware of, although mortgage lending standards have lowered a bit. I don't see good evidence for an imminent crash, and saying prices will decline if a crash occurs is tautological.
- ra1n85 8y agoHouse prices are the most expensive they have ever been relative to average income in 41% of markets [1]. Further, in 83% of markets the ratio of home price to income is growing. For the majority of US counties, we are seeing prices increase in both absolute and relative terms. At the same time, wage growth is nil and household debt has now exceeded 2008 levels [2]. We can argue about the implications of the trends, but the gist of my point is that an increasingly smaller pool of individuals is capable of affording houses in the majority of US markets. If the demand of that small pool of individuals, which is strongly tied to the health of the industry providing their wages, declines then we are in for a significant correction in home prices. [1] https://www.attomdata.com/news/market-trends/home-sales-prices/home-affordability-report-q1-2018/ https://www.attomdata.com/news/market-trends/home-sales-pric... [2] https://qz.com/1280927/us-household-debt-has-hit-an-all-time-high-of-13-2-trillion/ https://qz.com/1280927/us-household-debt-has-hit-an-all-time...
- dragonwriter 8y ago> A crash will inevitably reduce demand. No, a crash will occur iff demand collapses. You've reversed cause and effect.
- mcguire 8y agoI'm not sure about that. The direct cause of the 2008 crash was unavailability of loans once the risks of mortgage-backed securities became apparent, no?
- dragonwriter 8y agoNo, the direct cause was the drop in demand. Cutting off the spigot of loans was itself a direct cause of the decrease in demand: less financing means less quantity demanded at any given price. Demand, remember, is the function mapping price to quantity demanded.
- ra1n85 8y agoCredit was no longer available as a result of cascading failures triggered by defaults. The house of cards came tumbling down.
- dragonwriter 8y agoI don't disagree; the crash in the housing market was a direct result of a demand decrease which resultrd from credit tightening, which was itself a result of the wave of defaults which both revealed that current lending practices were unsustainable (which on its own would have led to tightening) and collapsed the huge market for mortgage-backed securities (which, itself, would have led to tightening). And so, as you say, the whole house of cards collapsed.