Jump to content
House Price Crash Forum
Sign in to follow this  
interestrateripoff

Denninger On The Housing Market

Recommended Posts

The Housing Market Will Heal?

This morning the pump monkeys are out again, trying to disabuse the mounting evidence that there has been no recovery in housing -- nor is there likely to be any time soon.

The reason is simple -- the premise for "home appreciation" wasn't supply and demand, it was the ratcheting effect of ever-lower interest rates that make re-financing and resale possible on a serial basis.

That is, you buy a house and instead of treating it as a depreciating capital good (which it is) you treat it as an appreciating investment -- that is, a store of value (which it is not.) You are enabled in this act of self-delusion by government interference in the market rate of interest, pressing that rate downward on an ongoing basis over the space of decades.

As I have previously pointed out what this enables is the following behavior:

  • You borrow $100,000 @ 10% interest. The interest payments assuming no principal paydown at all are $10,000 a year.
  • The rate of interest falls to 8%. The interest payments are now $8,000 a year. That would be fantastic except you decide to instead borrow another $25,000 because you can do so while still paying only $10,000 in interest!
  • The rate of interest falls, in several additional steps, to 4%. You now can have outstanding $250,000 in debt and still pay $10,000 a year in interest.

That, and only that, is what has driven "home price appreciation" over the last 30 years. Note that your house "gained" $150,000 in "value" even though absolutely nothing changed about the house itself.

This pattern resulted in entire industries (specifically, the Real Estate and Finance industries and those associated with both) to run a meme for 30 years that claimed real estate was an "appreciating investment." That claim was and is false; the increase in valuation had nothing to do with investment at all but rather was a simple function of leverage amplification driven by interest rate distortions.

Glad to see Denninger has put his dummy back in.

Just think how much you can borrow when we have negative interest rates!

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   211 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.