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Real Estate
Reply to "Salary vs House Cost"
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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote]If the home cost should be no more than 3x the salary, then, doesn't the home prices seem out of whack with the current salaries?[/quote] Let me put that another way. Historically, a normal RE market reflects this ratio. Sometimes, it is well below that (depressed) and sometimes well above that (overheated). RE markets tend to find equilibrium at about the 3x income ratio. [b]Remember, interest rates are being held down, deliberately, by a central bank (the Fed) that is buying massive amounts of bonds (most of them likely never to be repayed) with taxpayer (our) money. [/b] It is not sustainable and will not be sustained. Interest rates will rise, perhaps drastically, and we'll get back to 3x earnings eventually, probably below that, before the cycle starts again. If you borrow five times income at 3.5% to for your house, the buyer who comes after you, with your income level, can only borrow half of what you did should rates go to 7% and still "afford" the payments. And 7% is still below the historical rate for 30 year fixed paper. So think about who you will eventually sell to before jumping in.[/quote] This is wrong: 1. Taxpayer money is not used to purchase bonds; it is done through money creation. 2. The bonds will be repaid. What makes you think that they will not? The only way they could not be repaid is if the US went into default, which is extremely unlikely. How do I know? If it were likely, you wouldn't have government bonds paying one percent or less - the Fed is not the only buyer.[/quote] PP here - 1. You are technically correct. But printing money is still money we don't have and taxpayers are on the hook because, 2. The Fed is buying Mortgage Backed Securities - bad mortgages in unkown quantitiy. The Fed's buying power works at the margins to keep rates low - it doesn't have to be the only buyer and of course it's not. Believe in 3% money forever if you wish.[/quote]
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