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New Update of 120-Year Property Series Shows 22 Percent Nationwide Fall Ahead

April 4, 2010

Please forward questions, corrections, and reactions to comments below or send me an email to: mike@mynewmortgage.com

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Michael David White is a mortgage broker in Chicago.

20 Comments
  1. riffecfe permalink
    April 9, 2010 9:17 am

    I have to agree with jim b and the last post by Glenn Peters. Markets swing like a pendulum. Is it reasonable to assume that prices will only fall to the 100 year “normal” when prices became so completely insane in the 1997 to 2005 bubble?

    Compare the “peak” in 1895 with the following extended downturn which did NOT “just return to normal”, but declined for 25 years, THEN stabilized for another 20 to 25 years well below the “average”.

    There are powerful generational changes working their way through ALL markets, not just the real estate market. Compare the peak in 1895 to the peak in 2005. Then consider whether real estate prices will only “normalize”, or is the downside risk actually much greater than you propose?

    • April 9, 2010 8:29 pm

      Hello Riffecfe, It’s fair to say a bubble breaking will fall further than a long-term norm. I am not aware of any way of estimating the exaggerated fall after the manic boom. The long-run average is something I can determine and use. It gives us a starting point to guess about the future. Thanks for your comment. mdw

  2. Glenn Peters permalink
    April 8, 2010 12:23 am

    Hello Michael, and thank you for your reply. I’ll explain within the context of “What would I do with this data?”. I would do nothing with the data, insofar as drawing conclusions from the present average. There is no reason to believe house prices will seek equilibrium at the present 120 year average, any more than there was to believe that 50 years ago with a then 70 year average and so on. The scale of any such graph is indeterminate eg assume you had a 1,000 year graph; where would the trend-lines go? How would the current segment look, and how relevant would the current trend-lines look? The answers are of course, we don’t know, thus the indeterminancy. Let’s remember that what we’re charting here is essentially human activity and human perceptions of what assets are worth. One might posit that such things are essentially chaotic (dynamical systems) and thus always unpredictable in the long run, and I’m not inclined to disagree with that.

    • April 8, 2010 12:41 am

      Hello Glenn, I understand now what you are saying. It’s a fairly unique perspective to say that there is no pattern. My counter argument to your position depends on the analysis of the data collectors. Robert Shiller is on record saying that for 100 years there was a pattern. The pattern he described is of a “flat” asset. Real estate didn’t change in value. Nominal values changed with inflation. There was no other change. My original assumption (@ two years ago) was that property had real value growth and then bubble growth. Further reading required me to assume that property does not increase in value and that the bubble change in values was therefore even more exaggerated. My assumption now is that the 100-year trend (from 1990 and going backwards) is real and that a broken bubble will fall back to that long-run pattern. Thanks for your comment. mdw

  3. Glenn Peters permalink
    April 7, 2010 4:09 am

    No sophistry, here’s the logic. Any linear graph represents events over time. One’s interpretation of that graph depends upon the length (scale) of the series and the point during the series at which you wish to extract meaningful data, such as mean, median, SD etc. If you were looking for averages and trends in 1960, you’d draw very different conclusions. I’ll put it another way. You never know when you’re ‘middle aged’ (half-way through your life) until the series (your life) ends. All you can hope for with this 120 year graph is to extrapolate a moving average, which might be useful. If you were to plot housing prices changes on a daily basis, the trend lines over a four week period may be quite different to the scale for longer periods. I’m a professional investor and ex banker/economist who predicted and profited from the recent downturn.

    • April 7, 2010 7:06 pm

      Hi Glenn, Your argument doesn’t make sense to me. If we had started with a 10-year data set, you could say it is not enough time. If we had started with a 50-year data set, you could say it is not enough time. Is 120 years enough time? To me it is obviously not just a useful time period, but a much greater time period than I would expect to have available. I guess the gist of my position is that the longer the time period measured, the more likely you have a true long-run average. My prejudice is to accept 120 years as a valid period of measurement. What would you do with this data? thanks for your comment. mdw

    • Eric permalink
      April 18, 2010 4:20 pm

      How were you invested so as to profit? Not an easy thing to have done.

      • Glenn Peters permalink
        April 19, 2010 7:18 am

        Thank you for your query, Eric. I’m an anti-cyclical investor. I sold my house at the top of the bubble, and converted my aggressive equities-based 401K equivalent (I’m don’t reside in the US) to an all-cash fund. I bought up many hugely discounted stocks in September 2008 (mostly Australian banks) which have returned to their pre-crash highs and then some. Trading is essentially a zero sum game, and I’m one of the winners who profited from the losses of those who didn’t see all this coming. I now own all my properties outright, (purchased in the last 12 months) have no debt whatsoever, and have set up trust funds which will secure my kids’ future no matter what. IIRC correctly, it was JP Morgan who said that when the bell-boy gives you stock tips, it’s time to sell. My moment was when a friend’s mother tried to give me investment advice, having purchased yet another ‘investment’ property with 5% deposit etc. She’s now bankrupt.

  4. Chad permalink
    April 7, 2010 1:40 am

    I tend to fall into the “RE market has further to fall” camp, but it is a fair question about the premise of the post.

    Why not post WW II (remove the malaise of the great depression) or why not 150 years, or 200 years? I’m assuming 120 years is all that was available from CS, and that you prefer more data to less. Both reasonable justifications if true.

    But that doesn’t explain why you chose not to use a linear trend line from 1890 to present. You start from the assumption that this is a mean-stable system (i.e., assume that real estate is a zero real growth item), which I think is a dubious assumption, or at the very least incomplete.

    Standards of living have risen (maybe not in the past 20 years, but certainly in the past 120) which lead to a smaller % of income needed to feed and clothe leaving more remaining for items like housing. Vastly more households have multiple incomes, again leading to rising capacity to spend in excess of inflation or real wage growth. Financing is more available and more heavily subsidized by our government, reducing the “cost” of borrowing and again making it more possible to bid up homes. Ownership costs are more heavily subsidized by our governments (mortgage interest deductions, much higher marginal tax rates from which to deduct), and so on.

    Add these up and it isn’t the only reasonable conclusion that housing prices are a 0% appreciation item. If somebody predicted that housing would appreciate 30% in 120 years (130 vs 100 for round numbers) for a CAGR of something like 0.2%, you would not claim that to be an fantastically optimistic number, which is exactly what you’d have to believe to get from 1890 to current.

    Again, I agree in my gut that we have further to fall (and no, I’m not a Realtor), but take issue with the coarseness of your analysis and the dismissive attitude you project against suggestion that the analysis may not be airtight. We’re all guilty of fitting our analysis to support our conclusions. Just please don’t close your mind to alternatives.

    • April 7, 2010 1:49 am

      Hello Chad, good questions made in good faith are absolutely critical and i enjoy them immensely. when you have been doing these charts for a while, you have the same criticisms. many seem canned responses to kill facts. i am against fact killers. the problem too is that i look at this all the time and know much more background. a couple of critical things. the authors say that real estate was a zero appreciation asset for 100 years from 1890 to 1990. i still don’t know if i believe this, but i would never pretend to have greater knowledge than the data collection persons here (with high reputations which i think are deserved). the data is limited to 1890 forward as that is all that is available. the other obvious matter is the massive bubble. the first reaction a legitimate sentient viewer should have is: “Wow what a screwed up bubble we just had.” and if you have that reaction, how can you recommend that this is the right time to buy? you can’t — unless you are real estate broker who treats clients like kamikazee’s. thanks for your comment. mdw

  5. April 6, 2010 10:52 pm

    This article is more realistic than most. I have a different view. Most “experts” think the housing bubble is stabilizing. Some, like this article call for a continued decline for a while. I see a 2nd crash in stocks brewing. Along with that would be a meltdown in the financial system. Also, when the us govt stops supporting the artificial real estate market with loans no one else would make, look out below. I see the real estate market going BELOW the median as much it went ABOVE the median before this is over. You don’t end the greatest housing bubble in the history of the world without fireworks! As coach said in Hoosiers, “Don’t get caught watching the paint (In the housing market.) dry!”

    • April 7, 2010 1:51 am

      Hi Jim B, it is realistic to expect a bubble to break from mania to depression. thanks for your comment. mdw

  6. Harry permalink
    April 6, 2010 2:38 pm

    I agree with Glenn.

    This is the problem with charting data and extrapolating trendlines and expecting equilibrium at an ever moving average.

    Social/economic issues faced in the Western world today are as different as night and day when compared to other decades along this ‘arbitrary period’.

    When you look at the baby boomer generation beginning to downsize out of their McMansions en masse, the era of peak oil which will kill urban sprawl, the massive credit bubble that will continue to deflate for a decade, the historic low interest rates that are beginning to rise on the trillions of deficit spending by western governments and unemployment that will also remain high for a decade, it’s easy to see that housing over the next 20 years will be more represented by the period of 1920 thru 1940.

    Buy now? No. Rent now? Yes.

    • April 6, 2010 6:16 pm

      Hello Harry, What arbitrary period are you referring too? According to Mr. Shiller: “My data show that between 1890 and 1990 real home prices actually didn’t increase.” (Newsweek Dec 30, 2009. Why We’ll Always Have More Money Than Sense.). If there was a stable trend for 100 years, it makes sense that we would return to it. If there are large macro factors which lead us below trend, then the forecast would be more negative than the numbers i have given. thanks for your comment. mdw

  7. Chris permalink
    April 6, 2010 1:19 pm

    Actually Glenn has it bang on. Statistically, a more representative trend to pull from this data is the linear trendline from 1950 to 1996-97, after the last big spike and before the next one. If you continue that trendline to 2010 you end up very close to 134, which (allegedly) is where we ended Q4 2009. So this is the most encouraging piece of data I’ve seen, and indicates to me it’s now a good time to jump into the real estate market. Thanks Michael for this bit of good news!

    • April 6, 2010 7:06 pm

      Hello Chris, I would like to understand why you think the 100-year trend is not representative and why you say the statistics point to a period which you have chosen. You also seem to be predisposed to a good-time-to-buy conclusion. My opinion is that market risk is far too high for ordinary buyers. Thanks for your comment. mdw

    • April 7, 2010 12:56 am

      Chris:

      1997 is about 110. Following that trendline from 1950 to 1997 would take you at least another 50 years from today to get to 134. How on earth does having your house worth less than you paid for it (adjusted for inflation) for another 50 years make it a good time to buy?

      Let me guess. You are a RE agent, and it’s always the bottom, and it’s always a great time to buy? Were you also giving out this advice in 2007?

  8. Glenn Peters permalink
    April 6, 2010 2:49 am

    Interesting…however, a query and some observations. By what logic must graph of an arbitrary period seek equilibrium at the the present average? We do not know how long this graph will continue for, and as averages move as new data is accumulated, there is no reason to presume the period-to-date average is in any way meaningful.

    • Calling it like it is. permalink
      April 6, 2010 11:25 am

      Glenn that’s a weak sophistry.

    • April 6, 2010 7:11 pm

      Hi Glenn, I don’t understand your logic. You call the graph a graph of an arbitrary period. Yet the graph represents 120 years of data. How many years are necessary for the period to be representative and not arbitrary? If this data is not meaningful, then your argument must be that no data is meaningful. Is that your argument? Thanks for the comment. mdw

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