Sunday, August 28, 2005

House Prices vs. Personal Net Worth

According to this article, today's median house value as a percent of net worth is 2.6 standard deviations (sd) above the median for the last 50 years. Keep in mind that this is a standardized distribution, so the fact that inflation, incomes, etc. have been going up over the last 50 years is irrelevant. Given a statistic like that (2.6 sd), how can people actually claim that house prices "make sense", "are justified", "will continue to go up", etc?

2.6 sd is huge. A value of 2.6 sd implies that the area under the bell curve below 2.6 sd accounts for 99.533881197628% of the total area under the curve. Do the math yourself if you don't believe me.
"What does that mean in English?"

"Try this. You can be a member of Mensa, the high IQ society, if your intelligence quotient is at least two standard deviations higher than the median, or normal, IQ. That's an unusual score because it puts you in the top 2 percent of the population."

"And that's where current home values are relative to everything else -- about two standard deviations up from the medians of the last half-century."

"The bottom line: Collectively, we're heavily mortgaged in a period of extreme prices. The return to more normal prices could be as painful at the Great Texas Real Estate Crash."


Blogger Peter P said...

Brace for many 10-sigma "impossible" events in the coming months.

Aug 28, 2005, 11:43:00 PM  

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