Applying Case-Shiller Data to Price Predictions

[RottedOak]

Partypup, you write that you are “flabbergasted that the author thinks that a return to 2001 prices is out of the question.” I’m not certain who “the author” is in this case, but if you mean me (as the author of the post that started this thread), then I would point out that I said no such thing in my posts. I said that such predictions lack a foundation in the historical data.

You say that the situation we face is “completely unprecedented in the modern financial world” and that “Gauging the impact of the coming housing crash based on past downturns will be of no use this time.” So it seems that you consider the past data to be of little relevance.

Regardless of how relevant you think the past is, you should avoid making false statements about it, such as, “But prior to 2001, we had seen steady 5 – 7% appreciation.” Appreciation in San Diego was far from steady. Instead it showed considerable up and down swings. Here is the year-to-year average appreciation from 1987 to 2000 (from the Case-Shiller Index data):

87-88: 12.3%
88-89: 22.2
89-90: 8.8
90-91: -3.8
91-92: -2.8
92-93: -5.4
93-94: -1.7
94-95: -2.2
95-96: -0.7
96-97: 3.8
97-98: 13.1
98-99: 12.4
99-00: 15.1

Perhaps this downturn will be much worse than any prior one. Perhaps not. Either way, I can say with confidence that generalizations about impending economic collapse combined with falsities about historical appreciation are not going to convince me of it.

[partypup]

“Partypup, you write that you are “flabbergasted that the author thinks that a return to 2001 prices is out of the question.” I’m not certain who “the author” is in this case, but if you mean me (as the author of the post that started this thread), then I would point out that I said no such thing in my posts. I said that such predictions lack a foundation in the historical data.

You say that the situation we face is “completely unprecedented in the modern financial world” and that “Gauging the impact of the coming housing crash based on past downturns will be of no use this time.” So it seems that you consider the past data to be of little relevance.

Regardless of how relevant you think the past is, you should avoid making false statements about it, such as, “But prior to 2001, we had seen steady 5 – 7% appreciation.” Appreciation in San Diego was far from steady. Instead it showed considerable up and down swings. Here is the year-to-year average appreciation from 1987 to 2000 (from the Case-Shiller Index data):

87-88: 12.3%
88-89: 22.2
89-90: 8.8
90-91: -3.8
91-92: -2.8
92-93: -5.4
93-94: -1.7
94-95: -2.2
95-96: -0.7
96-97: 3.8
97-98: 13.1
98-99: 12.4
99-00: 15.1

Perhaps this downturn will be much worse than any prior one. Perhaps not. Either way, I can say with confidence that generalizations about impending economic collapse combined with falsities about historical appreciation are not going to convince me of it.”

Three points, Oak:

First, the author I was referring to was the assembler of data in the index;

Second, the 5-7% rate of appreciation I was referring to was based on my knowledge of Southern California real estate as a whole over the last 3 decades; it wasn’t limited to San Diego.

Third, even with respect to the data you supplied, taken over 13 years, I calculate an average rate of appreciation of 5.46%.

Fourth and finally, you have focused on one part of my post to the exclusion of what I believe to be the more important point: the unprecedented macroeconomic sword of Damocles hanging in precarious balance over the neck of the colective global financial community.

We can debate till the cows come home the finer points of San Diego housing data, the Case-Shiller index (for whatever that’s worth) and all manner and variety of real estate trivia. My fundamental point remains the same: this downturn will be deeper, longer and more frightening than any in recent or distant memory. The basis for that assertion has nothing to do with the data you cite, but rather with a fundamnetal understanding of the unwinding of the yen carry trade, China’s increasingly public reluctance to finance our debt, a brewing war that threatens to consume the entire Middle East, a recession looming in our rear view mirror, and a Federal Reserve caught between the Scylla and Charybdis of lowering interest rates to stave off a recession (thereby dooming the dollar) or raising interest rates to breathe life into the greenback (thereby dooming housing). These are all seismic financial events that have never happened before TOGETHER in U.S. history. We are, as they say, in uncharted territory.

The problem is so much bigger than San Diego, than California, than the U.S. The post-1971 global financial system that we have all come to know and love has been slowly unraveling for the past 30+ years. Now the unravelling has begun to accelerate — just as we are tipping into recession, just as geopolitical tensions are rising in a part of the world upon which we are dependent upon for our existence. Query: what do you suppose will happen when (not if) the U.S./U.K/Israel strike Iran? How resilient do you think the U.S. consumer and the equities market will be when faced with $80-$100/barrel oil?

We are facing a perfect storm of unprecedented magnitude. No previous housing downturn in U.S. history has ever occurred in the midst of so many disturbing and magnificently devastating factors. You can choose to focus on the “falsities” of housing data you think I have cited, but you are really missing the forest in your fascination of the trees. If I have made “generalizations about impending economic collapse”, please point them out. I believe I have only highlighted what any observer of macroeconomics knows for a fact: the days of the dollar and a bloated empire built on credit are quickly coming to an end. And when that happens, the housing market — yes, San Diego included — will never be the same.

[Anonymous]

pp, nice analysis of the C-S data.

I agree with your read of the macroeconomic situation, and the terrible confluence of ugly factors.

The Greek references are giving me a headache, though.

[PerryChase]

The problem is so much bigger than San Diego, than California, than the U.S. The post-1971 global financial system that we have all come to know and love has been slowly unraveling for the past 30+ years.

I think that partypup was referring to the possible unraveling of Bretton Woods II and the financial system that developed from the Smithsonian Agreement.

http://en.wikipedia.org/wiki/Bretton_Woods_system http://en.wikipedia.org/wiki/Smithsonian_Agreement

I agree with the macroeconomic world view. The bubble is not just in California, it's worldwide.  The world is going to have to come up with a a new system.  

BTW, I love Greek mythology.  It describes human nature pretty well.   

[RottedOak]

Yes, I disregarded the details of your “brink of collapse” predictions in my reply. I have read enough end-of-the-world-as-we-know-it predictions to know that they barely deserve a response. I remember how the population explosion led to worldwide famine in the 1970s, inflation ravaged the economy in the 1980s, peak oil destroyed the remainder in the 1990s, and finally society ground to a halt on Y2K. After living through all of those disasters, the unwinding of the yen carry trade should be a breeze. And we’ll need a cool breeze after all the global warming.

Do I think there will be a housing bust? Obviously. Recession? Probably. General economic disaster? I don’t think so. Your “macroeconomic” claims are just the latest fantasies of the inevitable and ever-present doomsayers.

[partypup]

Interesting that you choose to rebut my arguments with nothing approximating facts or data. Perhaps sarcasm gives you some sense of comfort in a world where there is increasingly little comfort to be had.

You’ve heard the doomsayers before, but because the world as we know it is still spinning, and people are still buying jet skis and driving Escalades, economic disaster is neither realistic nor possible in your mind. Because you’ve never seen disaster, you refuse to accept that it is a possibility; that you’ve never lived through a depression somehow gives you comfort that you will never experience one.

I don’t know what you term “general economic disaster”. Perhaps you care to elaborate? Is it when manufacturing and capital goods expenditures slow to a standstill, or even reverse themselves? Is it when foreclosures hit record highs? Is it when a country’s currency depreciates 60% in 7 years? Is it when increasing number of former members of the middle class seek public assistance? Is it when its people rely on credit cards to keep the engine of growth churning? Why don’t you tell me what “disaster” means to you, because I’m quite sure I can find plenty of early signs now — or if not, in the VERY near future.

I think it is a uniquely American trait that permits us to ignore the span of thousands of years of history and monetary lessons taught to us by countries far greater, wealthier, stronger and wiser. In fact, there is really nothing special about the United States, nothing that makes us immune to the fate that has claimed every country through history that has chosen the monetary, military and political decisions we have made. To believe otherwise is simply foolish, ignorant and arrogant.

I don’t “fantasize” about the demise of the country I was born and raised in, and have invested 40 years of my life trying to grow and prosper in. But I will tell you this: if we escape disaster with the storm looming upon us, it will be the first time in recorded history that a country in our predicament has managed to do so.

Only time will tell, and I think this time next year it will be very apparent which one of us had the foggier crystal ball.

For your sake, Oak, I hope you are better prepared than you are letting on and have at least planned for some very heavy rain, if not a tsunami.

[PerryChase]

I think it is a uniquely American trait that permits us to ignore the span of thousands of years of history and monetary lessons taught to us by countries far greater, wealthier, stronger and wiser.

Very true.  Americans are the forever positive types.  Talk to an unemployed  European mid-level manager and he'll complain about his lot.  Talk to the same unemployed American and he'll tell you how blessed he is and that being jobless is a  blessing that will lead to better opportunities.  

Every American thinks that he'll eventually make it into the ranks of the rich (although the stats point otherwise).  Therefore he doesn't really mind the privileges of the rich; and he's willing to work hard and kiss ass for the opportunity.  

I know it's a gross generalization.  But the positive American attitude does contribute to a more dynamic economy.  

 

[Wiley]

1. financing didn’t turn off in past declines (like it will this time)
2. homeownership rates were not as high
3. levels of saving among population were much higher
4. our fundamentals are worse then Japans before their asset deflation started
5. personal liabilities as % of income were not as high
6. gov’t liabilities for entitlements and current spening were not as high which will surely lead to higher taxes the previous periods.
7. the list goes on

IMHO most predictions will be far too conservative in their decline rates.

[Author]

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