Be Honest Now

Posted by: Michael Mandel on February 09

Suppose that in 2000 a friend laid out this hypothetical scenario for you.

a) Over the next five years, real wages will basically not rise.

b) over the next five years, the federal budget would go from a $4.5 trillion 10-year surplus to $2 trillion 10-year deficit.

c) The trade deficit would rise from about 4% of GDP to about 6%.

Then this friend asked you to predict what would happen to mortgage rates and housing prices under this scenario.

Would you have predicted that mortgage rates would rise and housing prices would stagnate? Or would you have predicted that mortgage rates would fall and housing prices would skyrocket?

Be honest now.

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Reader Comments

Wes

February 10, 2006 02:35 PM

I would have predicted there is no possible way a, b, and c could happen.

I also would have predicted that housing prices would continue to be stagnant (in 2000 they were just starting their rise). I watched my parents struggle to sell a nice home in 1996 that they bought for $69,000 in 1985. The final sales price was $83,000. Adjusted for inflation they lost $17000.

Since a, b, and c are true I have no confidence that housing prices will be sticky.

Yariv

February 10, 2006 03:49 PM

Yes, unfortunately, on income remaining relatively stagnant. No on the deficit and no on housing costs. The real-estate bubble has economic facilitators (such as interest rates), but it is essentially a psychologically and socially driven process. "Soft" economics are more situational than dispositional - you can't really predict them.

Paco

February 10, 2006 04:07 PM

Macro, several other things: You have more free time, unemployment is down 2%, the American Dream is still atainable, tax rates are lower, vacations are
the norm rather than a luxury, volunteerism and charitable giving continue to expand, and, as long as you don't cut someone off on the road, people are
still nice and courteous--until the next election.
One more thing, the 30 year mortgage will remain 1%
less than Prime, and the 15 year mortgage will have a higher interest rate than it's older brother, the 30 year mortgage.

Harry Chen

February 10, 2006 05:09 PM

No, I wouldn't have predicated that mortgage rates would fall and housing prices would skyrocket. The truth is that no one is really good at predicting the future. We should learn how to control what we can control.

pgl

February 10, 2006 08:04 PM

Based on (1), I would have expected weak demand for housing. Based on (2), I would have said interest rates would go up. OK, (3) gives me pause about the notion that interest rates would rise. But still - did ANYONE predict the surge in housing prices?

Friday

February 11, 2006 06:09 PM

Yes, it was easy to predict a rise based on tax law. You have forgotton the most important factor in making real estate the most attractive proposition for the majority of individual investors. Capital gains on a homestead are tax-free up to $500,000 for a couple and $250,000 for an individual. Compare that to a 15% capital gains rate on any other investment, no contest. You can repeat this every two years. Wes, your parents didn't have that in 1996.

Gary Anderson

February 12, 2006 08:04 PM

Yes but it seems the speculators have pulled back, Friday. Tax code alone does not a bubble float! 1 Trillion dollars in adjustable rate reset in 2007. You have to look ahead or you will be caught with your head in the sand.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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