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Another interesting insight when using data from Jan. 1977 is in this chart. This compares the deviation of the Case Shiller price from the XValue:
What I notice in this chart is that in 1980-1983, when interest rates were so high (mid teens!) prices people were paying were way above what we would expect based on the XValue. But we don’t think of that time as a bubble, because within a couple years interest rates had started their long march downward, and so people could refinance out of the high rates. Also, during the next few years prices didn’t grow much. So, I wouldn’t call it a bubble, since it never popped.
Which tells me, that just because prices go way above the XValue, we shouldn’t assume we are in a bubble. If it is followed by a period of lowering rates the XValue could increase rather than prices collapse.
I’ve got some new data from Rich that I want to share, and I’ve been working with the charts and trying to develop some insight into what I’m seeing.
Here’s the same chart as I used above but with data from Jan. 1977 through April 2021.
The orange is the CaseShiller price and the blue is the price I would anticipate based on interest rate and inflation. (From here on out I’m going to refer to the anticipated price based on interest rate and inflation as the XValue, just because that’s easier to type.) There are two things to notice before jumping to any conclusions about this chart.
One of the first insights I had when looking at this chart is that the vast majority of the time house prices were overvalued in the last 45 years. Then I realized that this chart assumes that the Case Shiller and XValue are equally valued in January 1977. But the chart has very few times that is true. Simply because my data starts on January 1977 doesn’t mean the Case Shiller and the XValue would be equal at that time. So, let’s take a look at the chart with the Case Shiller undervaluing the XValue by 30% at January 1977.
Now we see about an equal amount of overvalue and undervalue.
This also lead me to realize that without some anchor to tell me that houses were fairly priced on a specific date, it becomes very difficult to use these charts to tell if currently (or at any specific time) housing is overpriced or underpriced.
Previously I claimed that over the long term the vast majority of house price rise could be explained by interest rate changes and inflation. (Short term that isn’t so true, but long term it is) Now that I have more data I think that claim still holds up very well. To help see that, I can fit a second order polynomial to each data series to find the slope.
Here we see a purple line which is the fit for the Case Shiller, and the yellow line which is a fit for the XValue.
The next issue is that as prices go up, price increase look bigger than they are when measured in percent. Imagine this scenario: You buy two houses, one for $500k and the other for $200k. Twenty years later the first house is worth $1.5m and the second house is worth only $600k. So the first house has appreciated $1m and the second house has appreciated $400k. Which one has a better return? The answer is neither, they both tripled in price. But the higher the starting price the bigger the increase should be numerically. So, when we look at the above chart, the most recent years look like a lot more appreciation but as a percent not so much. To compensate for this it’s important to work with log scale on the charts if you want to talk about growth rates. So, here’s the same chart but with a log scale on the Y axis and no slope lines.
And now with the slope lines.
[quote=Rich Toscano]Second, if you are inclined, I’d love to see a variation on the final graph that, instead of mapping both series, just shows the % difference between each series. That would give a more fine-grained look at how over- or under-valued SD housing is compared to your indicator.[/quote]
Here it is:
Most notably you can see the big overvaluation that was the 2006 bubble. It looks like currently we are overvalued but not significantly.
