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Wrong--there's nothing artificial there.
"Demand" in economics means Qualified Demand, not unqualified "Want." Everyone wanting a Mansion and Olympic sized pool plus a landing strip for his/her personal jet airplane is not "Demand."
The government backing allows too much easy money which is what drives up prices. Without government backing, the irresponsible borrowers would not be able to bid up prices. The only people in the market would be people who saved up the down payment and then the houses would be affordable enough to buy with a 10 -15 year loan.
Easy money always drives up prices
that's 2.8% annual return on investment on your original $1M. Think you can do better elsewhere? probably. you can reduce your original investment by financing, and you might see a higher return, but that's just leveraging, and the D value (debt servicing overhead) will also go up and eat into your bottom line.
That's if you're renting it out. If you want to live there, the math is different, but this is your landlord's math conundrum.
cmdrdataleak saysthat's 2.8% annual return on investment on your original $1M. Think you can do better elsewhere? probably. you can reduce your original investment by financing, and you might see a higher return, but that's just leveraging, and the D value (debt servicing overhead) will also go up and eat into your bottom line.
That's if you're renting it out. If you want to live there, the math is different, but this is your landlord's math conundrum.
Don't forget to add in the mega appreciation rates that are typical of California.
However, they'd have to pay North of 50% taxes between state and fed on the gains from selling the property.
Strategist sayscmdrdataleak says
Don't forget to add in the mega appreciation rates that are typical of California.
Yes, the value of the property is likely to appreciate in actual market terms, even though you're getting tax advantage to claim depreciation of the premises.
In fact, my calculations in the comment above do not take into account at all what gain an investor would realize per year if they later sold that property. It could be a tidy sum. However, they'd have to pay North of 50% taxes between state and fed on the gains from selling the property. So even if the property appreciated 20%in value, they'd only net 10%. Over that amount of time, you could probably get better returns on, say, investing the same amount in total stock market index + total bond market index blend.
It's very much like stocks. The price of a stock should be approximately the earnings per share divided by the current interest rate. Say that a stock earns $1/share and the current interest rate is 5%. The stock would be fairly priced at $20/share ($1 / 0.05). At $20, it would be a tossup whether you should buy the stock or just get interest.
Similarly, the price of a house should be approximately the annual rent (minus upkeep, etc) divided by the current interest rate. If the house brings in $10,000/year in profit, and the current interest rate is 5%, then the house is worth $200,000. At that price, it's the about the same to rent or to buy.
Everything else is a bet on the future, and the future is hard to predict.
Hmm, my house would rent easily for $3200/month or $38400/year. At 4% interest that’s $960,000 that my house is worth. But Zillow lists a market price of $760,000. So is it a great time to buy?
If interest rates go to 5% then it’s worth $768,000. That would be break even territory with this math.
he government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?
Similarly, the price of a house should be approximately the annual rent (minus upkeep, etc) divided by the current interest rate. If the house brings in $10,000/year in profit, and the current interest rate is 5%, then the house is worth $200,000. At that price, it's the about the same to rent or to buy.
My beef is that government backed mortgages are "easy" money. I don't see that at all.+1000 This is EXACTLY why gov't-backed loans distort the housing market.
The government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?
HeadSet saysHappy - sorry, but you're wrong on this one. If the government backs the loans, banks will absolutely take a more risky approach to loans because downside risk is limited, while upside is there.he government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?
That's nonsensical. Banks loan out money as an investment and only do so when their analysis shows it will meet an ROI and generate profits. They will not make unprofitable loans just because they have additional money.
The bubble was caused by poor understanding of risk and outright fraud.
HeadSet saysThe government backing allows too much easy money which is what drives up prices. Without government backing, the irresponsible borrowers would not be able to bid up prices. The only people in the market would be people who saved up the down payment and then the houses would be affordable enough to buy with a 10 -15 year loan.
All that would do is create more landlords and higher rents. That would increase inequality and hurt the middle class. Housing prices would not fall much because anybody who is no longer a buyer becomes a renter and drives up the rental cost. This means investors can and will pay more for housing.
That's nonsensical. Banks loan out money as an investment and only do so when their analysis shows it will meet an ROI and generate profits. They will not make unprofitable loans just because they have additional money.
It's the same as when government encourages women and minority to buy stocks at the stock market cycle peaks.
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https://www.marketwatch.com/story/housing-market-now-reminds-me-of-2006-robert-shiller-says-2018-10-30