Well, I’m pretty sick to my stomach!

[NotCranky]

FSD,If we follow your exponential chart the next peak will be infinity? We don’t reach anything like comparable to historical affordability unless the median shoots about 3 feet below 6% line…or, if that is the inflation adjusted scenario take cover.

[PerryChase]

I don’t think that 6% – 8% growth is sustainable in the very long term to begin with. If that were the case, people wouldn’t be able to afford houses anymore since housing would consume a bigger and bigger proportion of income.

I think that Schiller researched housing prices at the peak a the end of the 19th Century. Prices peaked and dropped but did not recover until after WWII (if I remember well).

It’s not beyond reason for house prices to stagnate for a very long time. If China and foreign economies grow faster than ours, then that scenario is quite possible.

[PerryChase]

I don’t think that 6% – 8% growth is sustainable in the very long term to begin with. If that were the case, people wouldn’t be able to afford houses anymore since housing would consume a bigger and bigger proportion of income.

I think that Schiller researched housing prices at the peak a the end of the 19th Century. Prices peaked and dropped but did not recover until after WWII (if I remember well).

It’s not beyond reason for house prices to stagnate for a very long time. If China and foreign economies grow faster than ours, then that scenario is quite possible.

[SD Realtor]

My thinking is FSD just used the 6.2% as a value to show an example of where and when the crossing point would be. Take the graph as an example of how to do the analysis, use whatever numbers you like. It is clear that real estate won’t appreciate forever. There was a simple question posed and FSD was trying to answer it using a set of assumptions that he selected without any input from the board. I would figure 6.2% was selected because that may have been a valid appreciation rate for that time period for that particular region.

SD Realtor

[SD Realtor]

My thinking is FSD just used the 6.2% as a value to show an example of where and when the crossing point would be. Take the graph as an example of how to do the analysis, use whatever numbers you like. It is clear that real estate won’t appreciate forever. There was a simple question posed and FSD was trying to answer it using a set of assumptions that he selected without any input from the board. I would figure 6.2% was selected because that may have been a valid appreciation rate for that time period for that particular region.

SD Realtor

[sdcellar]

Also, I don’t *think* that FSD’s chart factors in inflation (and that’s intentional). That means that true appreciation is less (than 6.2%).

Of course, as Perry points out, guys like Schiller think appreciation and inflation should roughly be equal over the long haul. Even so, appreciation does deviate from that for significant periods of time historically, so there are good reasons to consider this.

[sdcellar]

Also, I don’t *think* that FSD’s chart factors in inflation (and that’s intentional). That means that true appreciation is less (than 6.2%).

Of course, as Perry points out, guys like Schiller think appreciation and inflation should roughly be equal over the long haul. Even so, appreciation does deviate from that for significant periods of time historically, so there are good reasons to consider this.

[Bugs]

I’m not exactly sure where in RB our original poster bought, but one of the questions she was asking was where her house would be had the price structure not blown up. As near as I can figure out, Rich’s long 50-year average price trendline intersects with pricing in late 1998 or so.

I took the liberty of looking up a few recent sales in RB in the $575,000 range, and it appears those homes were selling in the $225,000 ranges in late 1998.

It’s kind of a meaningless number, though, because the market will always swing high and swing low – those extremes are what create that trendline.

I think the better question would be where the market would have peaked out this time had this peak topped out equal to the one in 1990; that +25% mark occurred in late 2002 at about $400k or so. That means the following correction would have already bottomed out at about $300k or so in order to maintain the same trendline.

Just as a rough point of reference.

[Bugs]

I’m not exactly sure where in RB our original poster bought, but one of the questions she was asking was where her house would be had the price structure not blown up. As near as I can figure out, Rich’s long 50-year average price trendline intersects with pricing in late 1998 or so.

I took the liberty of looking up a few recent sales in RB in the $575,000 range, and it appears those homes were selling in the $225,000 ranges in late 1998.

It’s kind of a meaningless number, though, because the market will always swing high and swing low – those extremes are what create that trendline.

I think the better question would be where the market would have peaked out this time had this peak topped out equal to the one in 1990; that +25% mark occurred in late 2002 at about $400k or so. That means the following correction would have already bottomed out at about $300k or so in order to maintain the same trendline.

Just as a rough point of reference.

[(former)FormerSanDiegan]

Rustico – Not quite infinity. Between 800K to 1.5 Mil I would guess.

What were house prices in the 1960’s ? I have some friends who have told me about the house they could have bought for 30K in Point Loma in the mid-late 1960’s. The 6% line projected backwards hits about 25K in 1965.
Who would have thought that home valued at 25K in the mid 1960’s might be worth 6x that in 1995 (at a market cycle bottom).

The funny thing is, my chart comes to essentially the same answer as Rich’s (i.e. that home prices are about 45-50% overpriced relative to where they should be).
I didn;t think this would be controversial

Maybe the plot is more believable if viewed on a log scale. In that case a constant rate of return is a straight line.

[(former)FormerSanDiegan]

Rustico – Not quite infinity. Between 800K to 1.5 Mil I would guess.

What were house prices in the 1960’s ? I have some friends who have told me about the house they could have bought for 30K in Point Loma in the mid-late 1960’s. The 6% line projected backwards hits about 25K in 1965.
Who would have thought that home valued at 25K in the mid 1960’s might be worth 6x that in 1995 (at a market cycle bottom).

The funny thing is, my chart comes to essentially the same answer as Rich’s (i.e. that home prices are about 45-50% overpriced relative to where they should be).
I didn;t think this would be controversial

Maybe the plot is more believable if viewed on a log scale. In that case a constant rate of return is a straight line.

[PerryChase]

bugs, I love your posts. Your explanations are always clear and concise. You tend to draw on historical data. I too was in San Diego during the last boom and bust and the historical connection always hits home to me.

[PerryChase]

bugs, I love your posts. Your explanations are always clear and concise. You tend to draw on historical data. I too was in San Diego during the last boom and bust and the historical connection always hits home to me.

[(former)FormerSanDiegan]

OK, for some more fun, I combined a couple suggestions. I used a 4% growth rate, which is consistent with Shiller. I also used the base year of 1998 since this is a reference point that was considered normal.

End result is 2-3 years more pain and about 12% more decline in nominal price.

[img_assist|nid=3602|title=4 percent|desc=|link=node|align=left|width=466|height=349]

Or for those who want to see things on a log-scale (constant rate of growth equals a straight line). You can use this version of the chart and a ruler to make your own assumptions on growth rates based on your view of future home price inflation.

[img_assist|nid=3604|title=Basic growth rate plot|desc=|link=node|align=left|width=466|height=349]

[(former)FormerSanDiegan]

OK, for some more fun, I combined a couple suggestions. I used a 4% growth rate, which is consistent with Shiller. I also used the base year of 1998 since this is a reference point that was considered normal.

End result is 2-3 years more pain and about 12% more decline in nominal price.

[img_assist|nid=3602|title=4 percent|desc=|link=node|align=left|width=466|height=349]

Or for those who want to see things on a log-scale (constant rate of growth equals a straight line). You can use this version of the chart and a ruler to make your own assumptions on growth rates based on your view of future home price inflation.

[img_assist|nid=3604|title=Basic growth rate plot|desc=|link=node|align=left|width=466|height=349]

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