False Estate, from Kim Zussman

October 27, 2010 |

The attached plot is the Case-Shiller house price index, Jan 2000- Aug2010. The 20-city US composite is plotted in blue, Los Angeles in yellow, and Washington DC area in red. All three indices are normalized to 100 on Jan 2000, so it is possible to directly compare them.

LA's bubbly party was bigger than DC's, and both were much bigger than the 20 city composite. From 2000 to peak in 2006, LA increased 2.74X and DC 2.51X. To the extent that risk and reward are related, one would anticipate that LA would decline more than DC. Indeed this was the case: From 2006 peak to 2009 trough, LA declined 42% and DC dropped 34%.

Following the same logic, the reflation 2009-present should have been larger for LA than DC, but it is not: LA increased 11% and DC increased 18%.

Rocky Humbert writes: 

Instead of thinking about price as the independent variable, perhaps we should think in terms of supply as an independent variable?

The housing stock of the nation needs to grow– broadly in line with population growth.

Ralph Vince writes:


You are onto an interesting thread of thought.

I have been thinking that "Units per capita/average family size" may be the ONLY thing to eventually pull this market back from the brink. I think the notion of actually owning the dirt — the earth, and all it's rights from your feet to the center of the earth — the unique sovereignity of that, expressed as a certain intrinsic value, has been (as I have said in the past) diminished to a big bag of smoke.

We are property-taxed to death (at least in Ohio and Florida, where I own properties). Essentially, property values need to rise a GEOMETRIC average 5% per year just to keep pace with property. Additionally, the rights to our property have been all but relinquished to the municipalities, the death blow coming in USOC's KELO decision in mid '05 (corresponding most interestingly on the chart of home prices). (This cuts both ways incidentally. In one corruption-prone community I own property in, which abuts a large park system, where there is a 3 1/2 min acre per home, the village council, in an act of abject corruption, granting 130 variances to allow a developer to violate all of these rules and build "cluster housing" abutting the park, I have managed to get those elected officials tossed out and I am managing to garner enough local leverage it appears to take that as-yet undeveloped property via eminent domain).

I am wondering if the only thing to salvage property values is, in fact, an historic mismatch in the ration expressed earlier in this message.

Nigel Davies comments:

I'm totally unconvinced by this line of reasoning. If you look back in history, even one small century, there were often 20 or more people sharing houses which today would be occupied by 4 or less. And this is still the situation in many parts of the world today.

To me this means there is plenty of room for contraction in demand in which case supply stats become meaningless.


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