Saturday, September 01, 2007

All Aboard the Gravy Train, Next Stop: Housing Nirvana

I'm sure glad it's different this time around and the markets have figured out how to perfectly assess, slice and dice, and otherwise manage risk. It's a good thing there is no need for yet more government intervention in the "free-market" known as housing. What a relief. Frankly, I don't know what to make of the Bush-Bernanke-Obama-Dodd-Clinton-Gross bail-outs-that-aren't-really-bail-outs since house prices totally make sense, are completely justifiable and based on sound fundamentals, and are all-in-all priced to perfection.

Have a great extended weekend. And watch that last step; it's a doozie.


Blogger Matthew said...

All anybody with no history or perspective on this housing market bubble needs to do is study that graph in order to be able to predict the future... thank goodness..

This graph begs the following questions then...

Q1.. " What things derrive from excessively high home prices ? "...

Q2... " What things would derrive from home prices returning to historic norms ? "...

I'll start with just a few of my thoughts...

1. Higher tax base for local governments and schools... (that's if the money was properly spent)..
2. Increase in networth for select members of society
3. Smaller and fewer new and young families
4. Longer commutes
5. Pressure on wages and consumer prices
6. Longer work hours
7. Degradation of community spirit and good will
8. Shifting of community demographics away from minorities

1. Lower tax base for local governments
2. Reversal or slowing of all items 2-8 noted above...

Sep 2, 2007, 5:24:00 AM  
Anonymous Anonymous said...

This is misleading because it doesn't take into account gains in overall wealth during the period. As a nation, we make a lot more money (in real dollars) than we did in 1890. In fact what's most amazing about the graph is that housing prices lagged behind our growing wealth for so long.

Sep 2, 2007, 5:15:00 PM  
Blogger see me said...

Did Doug sip some of the koolaid? If you look at the boom and bust of the 70's and 80's people lost there shirts and those boom/busts are ant hills. This boom is so spectacular that even if it contracts only 50%- 70% (taking into account the nations prosperity)the ripple effects are going to be devastating.

Sep 3, 2007, 8:43:00 AM  
Blogger marine_explorer said...

That's a rather dramatic, even unsettling visualization of the housing situation for 2007. Maybe it's simply a great view from a new plateau of "wealth"--or the gravy train soon become the pain train?

Sep 3, 2007, 10:08:00 AM  
Blogger Marinite said...

As a nation, we make a lot more money (in real dollars) than we did in 1890.

How do you figure?

I love showing this graph from time to time because it tends to elicit some interesting reactions from people who don't want to accept its main message. It has its flaws but none of them eliminate the primary message it conveys.

Sep 3, 2007, 10:19:00 AM  
Blogger Marinite said...

Off topic, but I just saw this over on Ben's blog. It looks like there is at least one RE agent who now gets it and is sounding a lot like the bears who were so chastised for speaking such anathema:

“‘The crazy appreciation in real estate in the last few years is now in reverse,’ Kazan said. ‘None of the South Bay is as much of an island as people believe. We’re all pretty well interconnected and tied together. The outlying areas get hit worst and first, and then the flu spreads to more densely populated areas of Los Angeles and Orange counties.’”

Of course, he is talking about ritzy south Orange San Juan Capistrano, Newport Beach, etc.

Sep 3, 2007, 10:26:00 AM  
Blogger Telemill said...

This guy totally agrees . . .

Video here

Hey, remember that drunken rant guy video you had up last year? Wow, his drunken rant DID come true. I guess he was loud for a reason.

Sep 3, 2007, 7:43:00 PM  
Blogger Telemill said...

Wow, this guy showed how foolish the housing bulls were just 9 months ago.

See Video here

Interesting how the guys saying housing prices will go up . . . how they thought the guy that completely predicted the downfall was a crack pot . . . look at them laughing at him.

Wonder if they're laughing now? Nah, more like Kramer having a "melt down".

Sep 3, 2007, 7:51:00 PM  
Blogger Marinite said...

Re that second video, I bet those cocky nincompoops aren't laughing now.

Sep 3, 2007, 8:17:00 PM  
Blogger Matthew said...

There will be so much crow eaten after this thing is over, that we might as well place them on the endangered species list now...

It will take years to unwind this bubble. This bubble, by the way, is actually several bubbles in one. The first and the one that gets all the attention is the actual housing price bubble...

The other bubble is the arrogance and egos bubble which is tied up in housing and all things real estate. In many ways, this ego and arrogance bubble is more sinister than the housing prices bubble and more fun to watch unravel. I particularly like watching all the pundits and experts back peddle as they trip over themselves to try and figure this thing out.

Of course, I do enjoy seeing all those young Trumpies and Rich Dads eating crow and scrambling, as their RE investment portfolio withers away and slowly chokes them into foreclosure or bankruptcy..

As a group, they do seem to spend considerable time trying to rationalize why the housing price graph looks the way it does. Guess what Mr Toll fella ? It won't look that way much longer, so swallow it.

Sep 3, 2007, 10:50:00 PM  
Blogger Lisa said...

Our favorite Marin Heat Index is 0.39 today. I was wondering if/when it would dip below 0.40.

Is that a record low? Don't buyers recognize how special we are here?

Sep 4, 2007, 9:23:00 PM  
Blogger mrlmv said...

This chart doesn't just have flaws... its fundementally flawed. This chart shows you how much the average resale is worth at points in time relative to 1890. That is a question about the market that nobody is asking - so its useless.

It gets recycled from time to time to be used as an illustration of the insanity of home prices writ large - though it provides very little in the way of useful information to support that argument. All it shows is the inflation adjusted value of a home benchmarked to a home in 1890.

To start - why inflation adjusted? Of course that makes for a nice easy to read provocative chart but injects a relationship between inflation and home prices that doesn't exist - implying that gain associated with inflation represents opportunity cost and therefore needs to be factored out - which is false because you get to live in your house while you invest in it - making inflation moot. Gain associated with inflation is real return to an owner because they don't have to spend housing dollars on inflation impacted rent nor are they active in the market buying and selling - if you subtracted out the utility of the owned housing based on inflation this chart would look very, very different.

2. This ignores new housing? Why? Is my resale exempt from the impact of new construction when trying to determine price? No its not. (well in Marin it is because there is no notable new construction... but that's my point) I suspect that new construction prices have not risen nearly as dramatically over the last 10 years because new construction is less about land value and more about structure value - the cost of building a structure hasn't risen nearly as dramatically in most places (Marin is a bit of anomoly there as well) - which would undermine the point the chart maker is trying to convey. By factoring out new homes - you take out a big chunk of high value home square footage that appreciates at a slower rate because new construction commands a premium over existing construction in most markets - which would depress the comparative value of existing home prices relative to a benchmark - though ironically (in light of my point 1.) not in real terms.

3. Why 1890? Its seems an arbitrary point for a benchmark - in fact 110 would seem a more logical benchmark - because that's where exisiting housing prices have hovered in the post-war era. This of course would eliminate the "boom/bust" cycles of the 70's and 80's becuase its hard to argue that a 10% swing from trough to peak to trough is a meaningful cycle - only a tiny fraction of owners over that cycle will benefit or suffer from the full 10% swing - and if its 5% is that enough to get all up in arms about?

In some ways its this last point that's most important. This chart is really three separate charts (pre-WWI, Great Depression and Post WWII - these eras underwent fundemental market changes around which most of the other ocscillations could be considered nominal) that have been smashed together, while ignoring other important data, in the interest of supporting a pre-determined position on the issue of home prices rather than as the result of honest intellectual pursuit blind to preconception. The question unanswered by this chart - yet most relevant to most of the comments on this forum is - does the latest run-up represent a 4th era? If it does than all bets are off relative to the historical past - at least on a time-adjusted basis because those fundemental changes have not been properly normalized in this chart. Have there been changes associated with the general economy (mostly capital access for mortgages) and/or the resale market (urbanization of the population, population growth, a relatively recent shift of value toward land and away from structures, or the emergence of tear down remodel as a replacement for new construction) that would support the concept of a new benchmark - independent of the post-WWII era because of systemic change - just like that era was independent of the great depression era because of systemic change? I think it does. If you had 1930 as your benchmark and was looking at home prices in 1945 and said - well its pretty obvious where prices will be going - you would be still waiting (on an inflation adjusted basis) - and likely feeling kinda stupid. Today its easy to say that there was systemic change that was lasting and legitimate - but that's rear view driving. What if part - or even all - of the current run up can be ascribed to fundemental change - then statements like matthews become untethered from what this chart shows before you even address the other flaws that it has.

Does it mean that the assertions made based on this chart are incorrect? No. Don't misconstrue my complaints about this chart with defending a position that would be at odds with the points made by those that believe this chart supports those positions and is evidence of what prices for homes should be in a "normal" market. My point is that this chart doesn't really provide you with the right data to assess that.

Even if you can argue that there haven't been changes signficant enough to cause a lasting change in valuation parameters separate from the "stasis" of the post WWII era (which is over 60 years without any real changes with the exception of the current run-up) this chart still has enough flaws that as such it provides a highly illustrative visual aid that is as useful to thoughtful analysis of the future of housing prices as something that might be drawn by my 5-year old - though if you have a need to compare home-resale prices to 1890 on a inflation adjusted basis - you need to look no further.

Sep 4, 2007, 10:20:00 PM  
Blogger see me said...

I see the national debt clock just hit 9 trillion dollars! Thats US Dollars :)) It speaks for itself...

Sep 4, 2007, 10:35:00 PM  
Blogger marinite2 said...

This comment has been removed by the author.

Sep 5, 2007, 9:49:00 AM  
Blogger nero said...

Frankly, I think if anyone is interested in this graph, they should go read Shiller's book. Personally, I'd trust a Yale economist over the rantings of an anonymous poster (who seems to have a vested interest in seeing things continue on as they have been) any day of the week.

Sep 5, 2007, 3:44:00 PM  
Blogger mrlmv said...

Nero - would that be the book where he predicted that the Nasdaq was an overvalued bubble in 1996 when it was 1,000? I mean you could have made a ton of money following his advice - he was only 4 years early - of by over 4000 points - yes you read that right - he was telling you to be short a market that would rise to over 5000 when it was at 1,000 - and missed the fundemental shift in efficiencies and economic distribution amongst companies in a post-internet/networking world. That guy.

Well he was right in the long term - the bubble did burst - it went all the way back down to 2500 today... 150% gain really sucks...

In fairness I don't believe he advocated shorting... I think it was Treasuries at 6% - which compounded out would be about half of what you would have made if you did exactly the opposite of what he told you to do...

Sep 5, 2007, 11:51:00 PM  

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