Wait a minute. Who will buy those houses? At 6% annual interest rate, a 30-year mortgage on an average home would require payments exceeding three-quarters of an average household's income. And that's just mortgage payments - no property tax, insurance, maintenance, or utilities. Even at the entirely unrealistic zero interest, mortgage payments would equal 36% of income. Prices can be astronomical in a limited area, where only the region's elite can afford to live, but the study refers to the entire Washington Metropolitan Area, which, according to the article, will then span from Baltimore to Richmond and have a population of 9.9 million. If only the top 5-10% can afford housing in the area, where will the other 9 million live? There is a violation of the law of supply and demand in the study's results.
That study is yet another example of the dangers of extrapolating exponential growth rates over long periods. If you calculate the annual growth rates implicit in the study's results, they look reasonable: housing prices increasing 7% per year, and incomes 4.6% per year. Assuming 3% inflation, the real (net of inflation) rates are 4% and 1.6%. I might use those numbers myself if I had to predict prices and earnings 2-3 years from now.
The problem is that the difference in growth rates of 2.4% compounds to a factor of more than 3 (in other words, a difference of over 200%) over 50 years. What makes sense over short periods doesn't necessarily make sense in the long run.
On the bright side, we will not all be Pentecostals by 2075.
No comments:
Post a Comment