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sdduuuude
ParticipantCool.
ParticipantI consider myself a “recovering Piggington addict.”
I don’t stop by as often. I’m just here to make sure people don’t take powayseller tooooooooooooooooo seriously.
Participant“wow man if it’s that bad, I would start looking at porn…”
HAHAHAHAHAHAHAHAHAHA.
That’s the best advice ever.ParticipantThey both seem decent enough to me.
ParticipantThe thing about reversion to the mean, powayseller, is that you can always look back and say “see – it reverted to the mean.”
What you can do is reliably predict how and when it will do so.
One reason is, the mean changes as today’s data is added to the stats. One could say that in the long term, the mean always reverts to the data as much as the data reverts to the mean.
Second, there is an issue of time. Do you analyze the mean for the year prior to the bubble? 10 years? 100 years? 1000 years? What is the “time constant” of this thing? We don’t really know.
We could revert to the mean by starting on a new housing bubble next year, only to result in an even greater crash 5 years later than we thought. It could also be a soft-landing for 20 years. That would be a reversion to the mean, but at a different rate than you expect, and to a different level.
Perhaps this bubble is riding on top of a bust with a 40 year cycle, and part of what we have seen is a correction of that 40 year bust.
Lastly, reversion to the mean in many cases is a myth. Some would say that when you flip a coin ten times and it comes up heads 10 times, it is now more likely to come up tails so that the statistics regress to the mean. I’d say you have a rigged coin.
There is a reason why on all investment documents, it one is legally obligated to write “the past is no indication of future performance.”
Reversion to the mean is simply not the right analysis to do. I’m done w/ this thread.
Participant“name just one, *one* asset bubble that did not revert to
the mean”I’ll assume he meant prices, not the price-to-income ratio.
Pull out a median price graph going back to 1920 and lets take a look. Rich’s graph is convincing enough that a graph is coming – I sold a property in 2005 also because of it – but not sufficient to determine the level to which it will drop.
Participant“Where do you get that 25% number from?”
Just an example, my presumption being that people won’t wait until it gets down to -50% before striking. Someone will start buying back into the market before the median is 50% down, though. That’s all I’m saying.
ParticipantIt may be causal, but which is causing which (The recession or the housing crash), or is there a third element causing both? A classic question that cannont be answered by a chart.
Participant“He said that prices would not necessarily revert to the baseline ratio of price/income = 7, because of demand.”
Well, not exactly. I said that analysis using reversion to the mean on the house price to income ratio is not as appropriate as analyzing supply and demand, but such as it is with paraphrasing.
Demand curves are tricky, especially in consumer markets because perception comes into play with demand curves.
Right now, perception is “Wait until prices fall.” So, if prices fall a little, the demand may not change much. If they fall a “medium” amount (whatever that means), people will take notice but may not act. Eventually, the “waiters” will buy.
Further, due to the median price measurement, people perceive prices to be nearly dead even over the last year, not down at all.
Lastly, there are real estate agents out there twisting perception. The demand side of things is a complicated mess right now. The mix of buyer types is quite varied.
It is undeniable, however that as prices go lower, houses are more affordable. And there are people waiting. That is the key to my comment. There are people and probably big investment dollars waiting …
ParticipantBy the way, this comment is much appreciated in your original post:
“Now I will take the liberty to make a subjective adjustment.”
ParticipantKeep in mind, we are basically in agreement about the next few years. We differ on the severity of the drop and the supply/demand dynamics are the key to understanding it – not “regression to the mean” which doesn’t take market dynamics into play at all. It is just tinkering with numbers that may or may not predict the future. What regresses to the mean? Who knows. It is an easy analysis that doesn’t tell you much, IMO. Again – supply and demand is the key, not regression to the mean. I just think it is the wrong analysis to do.
We agree the picture is bleak for the next few years, but the long-term demand side is not as bleak as it may appear.
Yes, all those folks left San Diego for Phoenix, Vegas, Texas, and other places they really don’t want to live after living here. Yes, “many people who sell are leaving San Diego.” But that doesn’t mean they can’t come back ever. If prices drop by 30%, they’ll be back, maybe sooner.
When looking at the supply/demand picture, it is important to understand that when prices drop, demand goes up.
As the bubble deflates, and prices come down, people will be attracted to the market. As we’ve all said – it is better to buy a low-priced house with a high interest rate than a high-priced house with a low interest rate. Realtors will push this motto hard.
In another thread you asked (paraphrased) “What does it take to get buyers excited about the market again?” and I said “lower prices.” When the SFR median is 25% down, that means some neighborhoods and condos will probaby be down 40 or 50% and people will start buying again.
These are the kind of market dynamics to analyze to help gain insight into the future, not charts like the ones in your links.
ParticipantThose who sold at the peak may have known it ws the peak, and if everyone who sold bought a new home, we wouldn’t have decreasing sales, now would we?
ParticipantPowayseller – I think Steve Beebo has a great comment here:
“Real estate prices always boil down to supply vs. demand”
This is really the crux of the matter. Analyzing charts and trends and ratios of price to income is too far removed from the actual market. Don’t analyze the bottom line, analyze the factors that go into the bottom line and you’ll have a better feeling for what will happen.
May I suggest an analysis that predicts supply and demand by answering the question – “How many houses need to be panic sold in the next 3 to 7 years?” Is is 10? 10,000? 100,000? I don’t know, but I think that answer could help
The demand side may surprise you and others predicing ultimate doom – unlike me, who is predicting your basic doom. There are quite a few people who made lots of money in this boom. That money is sitting around in cash. You sold a house in 2005. You have cash. I sold a house in 2005. I have cash. In fact, if you look at all the sales recorded in 2004 and 2005, you start to realize that for every suicide loan, there is someone with a small truckload of cash – each of whom is a potential buyer in the coming down cycle, even if interest rates are high.
Figure out how many buyers will be out there, and how many houses will be for sale and that will tell you where the price will settle, not the price trend itself.
Participantbgates hit some issues correctly:
1) The stock-related chart is completely unrelated to real estate. Lets just ignore it.
2) You know what I think about that other guy’s article – it isn’t surprising that bgates had the exact same issues with it that I had when you last posted it. Lets ignore that, too.
3) The date from which you start the 1% growth is important, and can affect the analysis significantly. How did you come up with it? 2003 seems random.
4) Your SD analysis isn’t bad, however you make a leap of faith in your assumption that I can’t accept.Schiller claims that housing increases by 1% per year, nominally, but your analysis is on the ratio of housing prices-to-income. A major, major leap of analysis that has really no merit.
Schiller doesn’t make any claim about the ratio of housing to income. Just housing prices.
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