The quote below is from Jim Randel, a real estate expert and author on many topics real estate and money related. He presents a chart created by Robert Schiller in 2005. The chart is interesting and my interprepation of the chart follows (I responded to Jim via email). It is food for thought in this mad, mad, mad real estate world.
“Since I hold myself out as a real-estate expert, the question that people are always asking me is “how much lower?” In other words, how much lower will housing prices go before they hit bottom?
Here is what this chart tells us: that from 1890 through 1950, excepting the World War I and II periods, housing prices stayed within a fairly narrow range (adjusted for inflation). As you can see, in the year 2000 housing values were only about 10% above Shiller’s benchmark (1890 values). But then look at what happened in 2000!!
In just five years or so, prices doubled – fueled as we all know by a nasty cocktail of greed, bad lending, hyper-low interest rates, and an unquestioning belief in the premise that housing prices always go up.
So where are housing prices headed?? Well the dotted line on this chart shows you one interpretation of how much further prices have to fall: another 30% or so before they reach year 2000 levels and a point of seeming equilibrium (based on a 110-year history).
Don’t ruin your day by looking at the graph’s location in the “Great Depression” period (1920 – 1940). I would argue that stretch is an aberration. From 1950 – 2000, housing prices were pretty stable.
By the way, here is how Shiller describes what happened between 2000 – 2006 … sound familiar??”
“Irrational exuberance is the psychological basis of a speculative bubble … a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others successes and partly through a gambler’s excitement.”
Well, of course, I don’t know, but the chart below, produced by economist Robert Shiller and excerpted from his book, Irrational Exuberance (Doubleday, 2d Edition, 2005) shows you what many economists think.
Craig Goebbel from Real Estate Radio, here. I don’t want to argue with your interpretation about another 30% drop in home values but I have a different perspective from the very same chart. Note that since 1950 there is a floor of support above $105,000. Why? I would argue it is a result of more efficient markets, the consistent availability of 30-year fixed rate mortgages and a growing population. The other factor is the increased cost to build new homes due to the myriad of fees associated with a new home and developing its building site.
So, my interpretation is we are at the bottom overall, with some pain still on its way for some regions around the country.
I am not an economist but if you want four opinions on the economy, ask three economists.
Craig E. Goebbel
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Jim is a good guy to follow and you can find him at www.jimrandel.com.