The 9.7 GIM occurred in 1995 based off of rents applicable at that time. As we already said, those prices were undervalued relative to the long term trendline by 20% or more. Your 1998 purchase price would have been at or even slightly above the long term trend line depending on what time of the year you bought and how well you did on your price. At that point, a taller GIM of 12.0 or higher would have already been in order. In 1998, a 10.0 GIM would have represented a 20% decrease if that had been what the rental and sales markets were doing at the time.
Obviously, rents have increased since 1998 and the sales market has far more than doubled. I think it’s safe to say we are in uncharted territory with these gains and the truth is we can’t know for certain whether this current correction will stop halfway to the trendline, go all the way, or as in busts of the past, overcorrect below the trendline.
We have yet to see a correction that didn’t overshoot, so from a past-predicts-the-future standpoint there’s no evidence to say it won’t happen that way again this time. But if we have only the past to explain that it might happen again, we have absolutely nothing that we could point to that would explain why it won’t.
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The interest rate spike in the early 80s was just that – a temporary spike. It can be argued that the subsequent return to more normal rates helped to initiate and fuel the boom of the mid-late 1980s. Anyways, that interest rate spike evened back out after a couple years. If people are making a lot of money off of CDs it only begets more competition among depositers, thus resulting in lower yields. I see this as another example of what happens when there is an extreme – the forces of gravity will eventually bring it back into line.
Here’s something to consider, though. If the interest rates do go up, so too will inflation; and a loss of equity value through price inflation is just as much a loss as an outright price correction. So no, I don’t think we can justify overpriced @6% (based on the long term trendline) as being better than underpriced @12%.
