Credit where credit is due through a combination of tax credits, lower interest rates, and of late the resurrection of sub-prime lending the Fed has managed to restore both equity and real estate prices. In doing so setting the stage for the next bust as equities feature relatively high valuations, falling earnings and revenues. While real estate affordability is now center stage again as speculation has driven the family home purchase beyond the reach of most. When real estate blew up in 2007 it did so because the speculators got cold feet, the implosion of the syndicate to originate or issue mortgages and package mortgages into securities and sell them model followed close behind. The result was that prices rapidly reset to what market participants looking for shelter, not to be confused with speculation, could afford. Valuation is the primary determinant to success when it comes to achieving investment return. Real estate adds the ability to carry the payment and related costs, affordability. If the speculators turn, so will prices as it isn’t different this time and never will be. Affordability in San Francisco hit 12% in 2007 it is now at 8%, an extreme example to be sure, but there are many others that are similar.
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