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Bubble Trouble? - by Edward E. Leamer * Page - 11 But both the rental and the asset market for dwellings are highly evolved and do not suffer from the fixed price pathologies that cause shortages. We have high rents, or low rents, but no shortages. There is no "shortage" of dwellings any more than there is "shortage" of cars, or diamonds, or shirts. It’s not housing supply that is causing prices to escalate, it’s the recovery from the defense bust in the South and the Tech Boom in the North Just as with stocks, the housing p/e ratio can vary because of changes in the fundamentals, but also can be greatly affected by "irrational exuberance" or "incapacitating ennui". These psychological factors can persist for very long periods of time in housing because most buyers and sellers are not connecting rental streams with asset prices. They are thinking like the realtor who told me prices of ocean front property can never go down and like Steven Cochrane of Economy.com who thinks that California prices overall cannot go down for the same reason: supply constraints. Let’s think about these ideas like a fundamental investor would. It depends on what these growth limitations do to the path of rents, remembering that the price is the present value of future rents.
* Edward E. Leamer, |
