Housing valuation

Arnold Kling has an interesting post up on how to determine the economic cost of renting vs. buying, which has implications for whether or not the housing market's bubble is about to burst.

This is of somewhat personal interest to me, since my friend has just bought a house and thus he will go from renting to 'owning' (or, rather, paying enough to keep the bank at bay), here in the rather outrageously priced DC housing market. It certainly seems 'bubblicious' here, especially in the Rosslyn part of Arlington County, where teeny-tiny 2-microbedroom houses are going for $375,000.

The lowering of interest rates that is necessary to keep people buying houses even when prices are this high is right in line with Mises' description of a credit/inflationary boom. In order to stave off the crash, more and more money must be added (interest rates lowered, in this case), until you either stop (bubble burst) or you get a crack-up boom (bubble crash). If and when interest rates creep up again, I wonder if the DC market can handle it, or if it will pop and/or crash?

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owning a 2 bedroom condo in

owning a 2 bedroom condo in Arlington, VA myself, I sure hope the bubble doesn't pop!

Fortunately for me, I purchased my place about 3 years ago when prices were still high but not ridiculous. What really pisses me off is that the very liberal Arlington County Board pretends to be somewhat conservative by cutting property taxes by 0.5% but turns around and gives me a new assessment with a 45% increase!!!!

Not exactly knowing how they

Not exactly knowing how they come up with assessments, it does seem like a way to get some stealth taxation in- crank the assessments more than the rate decreases, and you have your cake while eating it too.

Being a lifetime renter/tenant (including childhood), I have very little knowledge of houses, buying houses, housing-related issues, etc. I figure it's rational ignorance on my part. ^_^

Only $375K for a two bedroom

Only $375K for a two bedroom house?? That's cheap. :-)

My friend is selling his house for $500K - all 1200 Sq Ft.

How do you know you're from the silicon valley?
1. you make $250K/yr and are on the bottom rung of the corporate ladder.
2. you make $250K/yr and still can't afford a house.
:-)

You might ask, how much

You might ask, how much inflation do I need to break even on the house? Let's assume that taxes wash out--you pay property taxes as an owner, but you get lower income taxes because of the mortgage and the property taxes. Your mileage may vary, of course.

In that case, if the mortgage rate is 6 percent, and the teeny-tiny house could rent for $1000 a month, or $12,000 a year, that is roughly 3 percent of the house price, so you need 3 percent appreciation to break even. That is a tad higher than general inflationary expectations, so I think I'd rent in that case.

On the other hand, near where I live, in a slightly less-desirable Md. suburb of DC, I saw a sign for a townhouse advertised for rent for $1800 a month (it might have had more bedrooms). That would be $21,600 a year, which is almost 6 percent. If that's what your friend's townhouse could rent for, then he can break even without any price appreciation, which would mean that he's got a pretty good chance of coming out ahead.

So, it's important to know the "E" to calculate the P/E ratio.

My opinion is that during mid-1990's, the P/E ratio on houses fell while nobody was watching. It's gone up since, but I don't think it's dramatically out of whack overall.