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Caught my eye
1. This guy makes me look like a piker. Imagine an obsessive quest to rate and blog every taco stand in Los Angeles. Thanks to kottke.org for the pointer.
2. Barry Eichegreen surveys views of the U.S. trade deficit. Full of substance, recommended.
3. Renowned Szechuan chef Peter Chang has just moved China Gourmet restaurant in Fairfax, Lee Highway. Ask for the Chinese menu and don't forget the Dan Dan noodles.
4. More on welfare economics: "wanting" is not always "liking."
5. Here is a new argument that there is no real estate bubble. In fact it is argued some homes may be underpriced. The key is to compare housing prices to rents on comparable homes, not rents on apartments. But can't a bubble in the asset market distort prices in the rental market?
6. Entomologist John Losey estimates "the economic value of insects," but hey good insects eating bad insects ought to net to zero, no? A bit of marginalism would not go amiss either.
Posted by Tyler Cowen on April 2, 2006 at 03:54 PM in Web/Tech | Permalink
Comments
You're right on number 5. A simple arbitrage argument should show that sale and rental prices should be closely related. them being related doesn't mean that there's no bubble.
What they would have to do to convince me that their method is sound would be to go back and look at episodes that we can agree were bubbles and then show that the link between rents and sale prices was broken.
Posted by: Ian D-B at Apr 2, 2006 4:36:23 PM
That taco-rating dude must be spending his life savings on Maalox.
Posted by: Peter at Apr 2, 2006 9:58:14 PM
6 doesn't hold true. The positive externalities involved with good insects is unrelated to the negative externalities of bad insects. That is unless I misunderstood what you're saying.
Posted by: Max at Apr 2, 2006 10:02:28 PM
Re #3, what about those of us who, you know, don't speak Chinese?
Posted by: asg at Apr 2, 2006 11:14:42 PM
Re:#5, One of their assumptions was a 20 % down payment and a 30 yr fixed rate mortgage(at 5.7%, a rate we're likely not to see again for years).
Here's some price data on Claremont, CA, where the Smiths live.
https://www.melissadata.com/lists/ezlists/ezHomeowners.aspx?zip=91711
The average house price in the last six months is $668k. 20% of $668k is $133k. According to the 2000 census, the median family income in Claremont was $78k. Let's say it's in the low 80s now. How many families with an $83k/yr income can come up with $133k or anywhere close to that for a down payment on a house? Probably very few. I bet that less than a quarter of the houses in the 91711 zip code were bought with 20%down/30 yr fixed last year. The only way that price level is sustainable is via interest only, negative amortization, and option ARM loans. Does it seem like "not a bubble" if the vast majority of families in your area can't afford to buy a house via the method you prescribe?
I've been tracking real estate data in Fairfax County for a while. I think this market is a bubble. Inventory in Fairfax, Loudoun, and Prince William counties jumped by about 25% in just the last month. Median price has been falling. Probably April or May of this year will be the first month with negative year-on-year price appreciation. www.nvar.com is a good source for statistical data.
Posted by: MjrMjr at Apr 3, 2006 12:44:04 AM
Tyler Cowen:
"But can't a bubble in the asset market distort prices in the rental market?"
No. Isn't that obvious?
OK, I can think of a couple ways it might distort prices, but I think they would be second order effects, and thus wouldn't interfere the assessment of whether there is a bubble.
Posted by: L at Apr 3, 2006 1:11:30 AM
If houses are fairly valued relative to bond and stock prices, then that means that there is zero premium on housing (an illiquid asset) compared to liquid assets. Surely the absence of a liquidity premium is the definition of a bubble?
Posted by: dsquared at Apr 3, 2006 4:25:49 AM
Of course, in the housing market, one obvious
comparison is between apartment rents and comdominium
pricing. At least in Chicago right now, it's a bit
cheaper (10% - 15%) to rent than to own (comparable
properties).
Posted by: Donald A. Coffin at Apr 3, 2006 11:33:56 AM
The article even admits there is a bubble in the san francisco bay area.
Posted by: joe o at Apr 3, 2006 5:57:48 PM
Presumably, the rental market is pretty much a spot market, so moves to a market-clearing rent pretty quickly.
That is, there's no incentive (absent rent control) for a renter to pay a high price in anticipation of future capital gains. Rental, much like labor, is a supremely perishable good. Use it or lose it.
But perhaps I'm missing the point... exactly how would a bubble in home prices create high rents? If anything, if lots of people are buying properties that aren't primary residences (for speculative purposes), they're going to rent them out in the meantime, possibly depressing rental prices.
And what would keep those rents from being driven down to market clearing?
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