Solve for the equilibrium price of real estate

This caught my eye:

In the world’s biggest covered-bond market, a Danish bank says it’s now ready to sell 10-year mortgage-backed notes at a negative coupon for the first time.

Imagine a world where you didn’t pay interest on mortgage loans, rather the bank paid you interest to reward you for borrowing money from them.  How big a home would you buy? Yes, I understand that these are MBSs, not actual mortgages.

Still . . .

As Tyler Cowen might say, “Solve for the equilibrium price of real estate.”



14 Responses to “Solve for the equilibrium price of real estate”

  1. Gravatar of Derrick Derrick
    5. August 2019 at 11:03

    Maybe Danish homes are really terrible to live in.

    Seriously though, what is the implication of a negative rate when notes are backed by mortgages, rather than negative rate bonds generally?

  2. Gravatar of Steven Kopits Steven Kopits
    5. August 2019 at 11:04

    What does that mean if the demand for housing will be less ten years from now than it is today?

    Solve for the equilibrium interest rate.

  3. Gravatar of rayward rayward
    5. August 2019 at 11:23

    You might not buy a bigger home but you would buy a higher priced home. Rising asset prices: the path to prosperity, until it isn’t.

  4. Gravatar of rayward rayward
    5. August 2019 at 11:32

    The Dow fell 950 points today, but has stopped falling. What is the Fed doing to stop the plunge? What will the Fed do tomorrow? It will be interesting to see what happens as we approach the close. Reliance on rising asset prices for prosperity is a recipe for disaster.

  5. Gravatar of Kevin Erdmann Kevin Erdmann
    5. August 2019 at 11:34

    In a market with enfettered capital flows, the equilibrium would be that interest rates would move back up as savings was sucked up into deferred consumption in the form of lumber, gypsum board, etc. in more and larger homes until the cost of building and the present value of rents reconverged.

    To me, this is sort of like your hypothetical about the Fed buying up all the world’s assets. In that hypothetical, the Fed transfers profits to the government with no downside. Here, we all get to live in magnificent mansions with no downside.

  6. Gravatar of Steven Kopits Steven Kopits
    5. August 2019 at 12:31

    In a post peak demographic world, the demand for real estate, ceteris paribus, will be continually falling. If real estate in real terms continues to depreciate, what is the right interest rate to pair with that?

    In Japan, the workforce has been declining and will continue to decline until at least 2050 at the rate of 1.2% / year. Metro Tokyo has seven million dwellings averaging just under two persons per dwelling. That means approximately 100,000 surplus dwellings are hitting the market every year. How much would you pay for a 30 year mortgage when 30 years hence demand for existing housing will have fallen by 30%, when you have an expectation that more than two million of those dwellings currently occupied will be empty?

  7. Gravatar of stoneybatter stoneybatter
    5. August 2019 at 12:45

    Off topic, but here’s another prominent economist getting on the Sumner train:

    “if they [the Fed] want higher interest rates in the future, they need to keep rates lower now”

  8. Gravatar of Ben Ben
    5. August 2019 at 12:50

    This is caused by policies you favour in these scenarios i.e. endless monetary stimulus and endless QE.

    There is a point where it no longer works, and where we desperately need something new, and Denmark is getting scarily close. Something like fiscal stimulus or even something crazier like helicopter money.

  9. Gravatar of Steven Kopits Steven Kopits
    5. August 2019 at 13:29

    Why do we need a stimulus? Unemployment is near historical lows and the CBO says the economy is operating above potential GDP. There is nothing to stimulate.

    What we need are more children.

  10. Gravatar of ssumner ssumner
    5. August 2019 at 14:24

    Ben, Wait, the eurozone policy is what I favor? Have you read any of my last 5000 posts?

    Steven, Stimulus? We need stable NGDP growth, and more immigrants.

  11. Gravatar of Benjamin Cole Benjamin Cole
    5. August 2019 at 15:47

    The US needs more immigrants perhaps, but not too many as the US does not build ahousing or infrastructure anymore.

    But if population declines result in lowered housing costs, why not shoot for decreasing population?

    Hong Kong is not a promising future, when compared to Japan.

    There is another interesting idea to ponder. Do urbanized capitalistic societies pay the employee class enough to reproduce? If not, is that why immigration is sacralized? Or, does it work the other way? Immigrants push down wages below the level needed for the employee class to reproduce.

  12. Gravatar of Benjamin Cole Benjamin Cole
    5. August 2019 at 15:57

    Steve Kopits: In point of fact, the number of people employed in Japan recently set a new all-time record. Women and older people are in the labor force now.

    Also, Tokyo is still growing. If you want to look at the beneficial effects of population declines on housing costs look at Sapporo. You can rent a one-bedroom apartment there for $450 a month.

    You might pay ten times that much in Hong Kong. Obviously living standards are much higher in Sapporo than Hong Kong.

    The street riots in Hong Kong are not just about beijing’s heavy-handed interference. They are also about wage stagnation and housing costs.

  13. Gravatar of Tuesday assorted links – Marginal REVOLUTION Tuesday assorted links - Marginal REVOLUTION
    6. August 2019 at 08:51

    […] 1. Solve for the equilibrium price of real estate. […]

  14. Gravatar of Anonymous Anonymous
    8. August 2019 at 20:12

    I had read that in Japan, people mostly build new houses, knocking down the old one if it’s there- rather than buying used homes.

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