Thursday, September 02, 2010

Do low rates make house prices more volatile?

Over at the FT blog, Cardiff Garcia has a nice summary of three papers that attempt to explain the run-up in house prices before 2007. It particularly approves of the work of my friend and co-author Susan Wachter and Andrew Levitan, who argue that a supply-side credit bubble produced the housing bubble.

As I read the piece, though, I couldn't help but think that while it is unlikely that low interest rates would explain prices, they might explain volatility. When nominal interest rates are low, a small change in price expectations can lead to a large change in prices.

Consider the Gordon Growth model, where Value = dividend/(i-g), where in this case the dividend is the value of living in a house, i is the interest rate and g is the expected growth rate of the dividend. Let everything be real (i.e., not nominal) Consider two worlds: 2 percent real interest rate world and a 4 percent world. Now let expectations about growth vary from negative one percent to positive one percent. In the two percent world, the upside scenario produces three times the value of the downside scenario. In the four percent world, the upside produces 67 percent greater value than the downside. Hence small changes in expectations have a much larger impact in a low interest rate environment than a high interest rate environment. It may be hard to pick this up because expectations are so difficult to measure.

Just a thought.

7 comments:

slvbdbs said...

I was looking for a building, the apartment and found everything on this page.
but the complete and more accurate info on this http://columbushomesrealestate.com

slvbdbs said...

I was looking for a building, the apartment and found everything on this page.
but the complete and more accurate info on this http://columbushomesrealestate.com

angelita1423@gmail.com

aiya said...

Office 2010
Microsoft Office 2010
Microsoft word
Office 2007
Microsoft Office
Microsoft Office 2007
Office 2007 key
Office 2007 download
Office 2007 Professional
Outlook 2010
Microsoft outlook
Microsoft outlook 2010
Windows 7

led said...

Christian Louboutin Tall Boots
Christian Louboutin Wedges
Christian Louboutin Pumps
Christian Louboutin Sandals
Jimmy Choo Shoes
Moncler Kid's Jackets
Moncler clothing wholesale
Wholesale Moncler Jackets
discount Moncler Jackets
http://www.shopmoncler.hk/moncler-jackets
http://www.utsource.net/BUK444-500B.html
http://www.utsource.net/MG50Q6ES41.html
http://www.utsource.net/UM150CDY-10.html
http://www.utsource.net/MP7002.html
http://www.utsource.net/TMS320F2812PGFA.html
http://www.utsource.net/CEM3374.html
http://www.utsource.net/2sj74.html

Admin said...

Keep going really liked your post hoping to get more such informative post.

Buy A Ready-Made Logo

justin albert said...

Awesome blog! I will for sure drop by it more often!

Customize Facebook Fan Page

Admin said...

Cute its really very cute, and i think its a very unique and interesting fashion also, ladies can enjoy this fashion, i like it much.

Mobile Camera App