[legion]

A comment on the RE thread got me thinking...

When one can buy an asset with leverage, does that allow the price of the asset to become detached from its intrinsic value?

Some examples:

Stocks. The intrinsic value of a stock is the net present value of future dividend payments. Based on a quick scan of PE ratios, most stocks trade for many times their intrinsic value.

Homes. The intrinsic value of a home, adjusted for inflation, and barring some change in circumstances (like a toxic dump is built next door), should never change. Yet on the coasts, home values have doubled, tripled, quadrupled or more in the last ten years.

Education. The cost of college should be less than the net present value of future earnings to be worthwhile. I don't think this is true of all colleges anymore.

Does the fact that these are commonly financed with someone else's money mean that people are more likely to speculate with their purchase? The are more tolerant of price increases that depart from intrinsic value because they anticipate future gains will go up even more?

In all three examples, I think if financing the purchase of these assets was impossible, then prices would be both stable and lower. If people had to spend real money (and not borrowed money) on them, then their costs would be more closely weighed against their intrinsic value.