Random Observations on a Historical Chart

I’ve been updating the FAQ list and I thought it would be interesting to denote the start of the Econo-Almanac on a chart of home valuations (ie, CPI-adjusted prices) and sales. I used the beginning of 2000 as the start date because I like round numbers:

Sitting back and looking at this graph, a couple interesting observations jump out at me. First, it took fewer than 5 years for home valuations — not just nominal prices, but home "expensiveness" compared to everything else — to more than double. This increase is absolutely staggering. Nothing new there, I guess, but it continues to amaze me that so many people bent over backwards to come up with any rationalization they could to avoid the only explanation that made sense: a massive, debt-financed speculative bubble. I’ve learned a lot studying this bubble, but the most amazing has been the tremendous capacity that humans have to believe what they want to believe, to an extent that I never would have imagined possible if I hadn’t witnessed it in unfolding realtime.

As an aside, on the topic of rationalizations, I always have to laugh at the one that home price apologists were quickest to bust out. Since they couldn’t actually come up with any credible factual retorts, they’d always just attack the people making the bearish arguments, saying that they were just renters who were bitter because they couldn’t afford to buy homes. What’s so hilarious about that argument is that thanks to all the no-doc, neg-am, zero-down loans available for the taking, anyone could afford to buy a home. That was the cause of the whole problem! It’s just hilarious to me that even their ad hominem attacks were completely illogical.

This was definitely a common gambit, though, despite its absurdity. All the way through mid-2006, I’d estimate (though occasionally later, even as recently as last month) I was subject to nasty personal attacks about both my inability to afford a home (because I was apparently the only person in San Diego who couldn’t qualify for a no-doc, zero-down, neg-am loan) and my slow-witted inability to understand that they weren’t making any more land. I got plenty of hatemail, and the Craigslist and Union-Tribune message boards in specific were stomping grounds for people who absolutely loathed me.

I’m not mentioning this to generate sympathy — there’s a point, and that is this: you’d think that I had a website dedicated to emotionally abusing kittens, from the kind of stuff people wrote, not one that published some charts and graphs about what was going on in the housing market. Such a level of vitriol was telling. A true investor, and a true believer in the value of housing, would welcome such skepticism. The more people who doubted housing’s value, the true investor would think, the less competition to invest in houses, and the more people to rent from the investor. And yet this wasn’t the reaction at all. To suggest that prices would go down, or even to suggest that they would stop going up, evoked extremely violent reactions. This indicated that at some level, the bulls realized that it would all come unraveled if prices stopped rising — as always happens in a speculative bubble. Even they partly understood it at the time, though they wouldn’t admit it.

OK, that was a really long aside. The other interesting thing about the chart is the disparity between how easy it is to look back at the chart and see what was going on versus how hard it was to know at the time. The volume question was never too tough — there was a final surge of panic buying in spring of 2004 (this was the era of multiple offers, buyers writing plaintive letters to sellers explaining why they deserved to be the ones to overpay for the sellers’ houses, etc.) and then things went downhill from there. Prices were a different matter — there was never much question in my mind that they would decline, but the timing and extent of said decline was a lot tougher to pinpoint. Looking at the chart above, you can see that valuations topped out very slowly, over a period of about 2 years, pretty much going nowhere from late 2004 to late 2006. This multi-year topping process is so clear now, but at the time, while we all had our suspicions, none of us knew for sure what was really going on. (Although I would single out the later vintage hatemailers as really not knowing what was going on ;-).

Anyway, I just thought that was kind of interesting. It’s also instructive for our analysis going forward. Our human nature wants to retrofit our memories to overestimate what we understood at the time, as best described via Taleb’s "narrative fallacy." The character of the bubble’s end all seems so clear now, but it was a whole lot murkier in realtime — that’s something to keep in mind for the future!