As promised, here is a followup chart to Friday’s article on how long it’s been since home prices were at current levels.
This chart once again uses the Case-Shiller index to track San Diego home prices but adjusts those prices for the effects of inflation as measured by the Consumer Price Index. By taking account of inflation, we can observe how expensive housing is (and was) not just in dollar terms, but compared to everything else.
Schahrzad Berkland at CA
Schahrzad Berkland at CA Housing Forecast is calling for a return to 1999 prices (and a nice nod to the Piggies):
http://www.californiahousingforecast.com/commentary/2008/6/1/the-end-of-the-housing-bubble-1999-prices.html
"…2.5 years later, my forecast remains: real estate prices are wildy inflated, and each house in southern California will return to its 1999 price, by 2011 – 2013. This forecast is based on history and economic principles: real estate rises with inflation, and local incomes determine rents and house prices.
Nationally, house prices historically rise with inflation, or about 0.4% in real terms (Robert Shiller). The recent boom in house prices is simply a bubble.
…
Real estate's intrinsic value, as opposed to its market-euphoria-created prices on which appraiser unfortunately base their valuations, is based on two factors: cash flow (rent), and local incomes. For the cash flow factor, investors use a Gross Rent Multiplier (GRM) of 10 – 12 to determine if a property is a good investment. For example, if the rent is $2000/month, the GRM is $200,000 – $ 240,000, and the investor would not pay more than $240,000. We use rent data to approximate how much to pay for a house, and if it remains overvalued. Oh boy, are we ever!"
And Rich, your accomplice over at Voice of SD, Kelly Bennett, had this little quip from some RE advisor named Gary London concerning redevelopment of downtown National City:
http://www.voiceofsandiego.org/articles/2008/06/02/survival/514london060208.txt
"…Essentially, National City (and Chula Vista) missed its 'window of opportunity'. Projects which were in the entitlement/pre-construction stages were taking an exceptionally lengthy time to come on line. I do not expect this market to recover in the foreseeable future to the point where new projects will be feasible, and certainly not until the central San Diego urban markets have stabilized and recovered. Think six to ten years."
Gulp.
Brad
Rich,
Since there’s so much
Rich,
Since there’s so much disagreement about the “right” inflation measure (due to all the distortions in the CPI), why not plot “real” housing prices just using the growth in san diego rents as the “inflation” component. Reasonable people can disagree about what the various weights in the CPI should be, or how much hedonic adjusting and substituting should be done, but rents are rents and are directly comparable to the cost of home ownership. Actually, though, it probably doesn’t make a large difference as rent growth over the last several years probably isn’t dramatically different than growth in the CPI. Anyhow, just a thought.
Rent must be logical over
Rent must be logical over the long term(if not distorted by government/tax changes). Shorter term is tricky as rents have their own determinants. Rent tends to be focused on the poorer sectors of society and hence not the best deflator of all sectors of the property market.
My preference would be for nominal GDP or National Income, were that available regionally. But for the national index, nominal GDP or National Income would be my choice as it captures the increase in the underlying economic health of the nation and inflation and hence rises much faster than inflation.
Also the income of the rich is captured (especially entrepreneurs) whereas it is not in earning figures….and for those of you who look at coastal communities, that part of income is often more important that conventional salaries.
I don’t know how to capture black economy income though!!!
He did plot prices vs. rent
He did plot prices vs. rent and income:
http://piggington.com/this_just_in_san_diego_homes_are_overpriced
Does anyone know what
Does anyone know what inflation measure is assumed in the graphs?
Consumor Price Index:
Consumor Price Index: http://www.bls.gov/CPI/
Evidence of a market at its
Evidence of a market at its bottom in OC?
O.C. monthly home sales crack 2,000 for 1st time since credit crunch