Monday, February 27, 2017

Housing: Part 209 - Only chumps are bulls

Of all the forecasts Irving Fisher may have made, the one we tend to remember was his bullish call on the eve of the Great Depression.  Robert Shiller's CAPE measure could give a sell signal for the next 30 years, yet he will still be introduced as the person that predicted the housing bust and the internet bust.

Serious people don't say assets are underpriced.  That's for the real estate seminar snake-oil circuit.

Chart: US home prices are rising too quickly -
— (((The Daily Shot))) (@SoberLook) February 24, 2017

Who could disagree?  One could note, I suppose, that it is stacking the deck to set the indexes to 1996, during a cyclical low-point in real estate values.  But, if prices are never too low, that would be exactly where you should set them, right?

I have reproduced this graph with a few cities added.  One might argue that "US" home prices aren't rising too quickly.  But, prices are never too low.  So, there are only cities that are uninteresting - not worth looking too closely at - and cities that seem to be too high.  This is the Overton Window.  Nothing exists outside.  Only a chump would look out there.


Here's a Zillow listing that seems typical for parts of Atlanta.  As of this posting, estimated rent is $900/month.  With a "predatory" loan - 0% down and 7% interest, monthly payments would be $500.  Is there anyone today that would even be willing to make that loan, even if they knew it would be profitable?

US home prices are rising too quickly, folks.  What else do they ever do?  It seems like a never-ending battle.  We gots to keep fighting to keep those prices low, folks, or else those rubes in Atlanta might be convinced by some greedy banker that they have any business owning a home, and since they don't know nothin', Lord knows what crazy price they'll bid it up to.  And, we all know how that turns out, don't we?

PS. Right after I saved this post, I clicked on twitter, and my feed was loaded with tweets exclaiming, "Guess who Trump selected to chair the Council of Economic Advisors?  That idiot who predicted the Dow would hit 36,000!"  Kevin Hassett could literally invent functional cold fusion, and his grave stone will read, "This idiot made a bullish prediction that didn't turn out well."

PPS.  Consider this a sort of mea culpa regarding the first PS.  Brad DeLong has a good post taking down Dow 36,000.


  1. OK, very real questions here.

    1) Am I reading that right that Chicago is now (relatively) cheaper than Atlanta?
    2) What happened to NYC? Why didn't they recover when LA and SF did, and the Pac NW is booming?

    1. 1) relative to 1996. Rents tend to be higher, especially in prime locations. So, the median home price is somewhat higher in Chicago, but Price/Rent is similar in both cities.

      2) I'm not sure what the whole story is on NYC.

  2. Great post. There are no reverse bubbles.

    BTW--the house prices in L.A.--- does that mean living standards are lower there?

    1. I'd say yes, especially for less skilled or less educated workers. Workers with skills specific to high end labor markets where LA has positive network effects make higher incomes to make up for it.

  3. I really like this topic. A couple of years ago, Krugman gave Baker kudos for calling the housing bubble in Aug of 2002 which is silly because if anything history has shown that 2002 was still a good time to buy. And I believe Shiller gave speeches about the overvalued stock market as early as 1995. Luckily for him, his book didn't come out until 1999. I ran into this type of thinking for years when I worked for a large insurance company. No one there would ever say anything bullish. Being wrong on a bullish call was the worst mistake one could make. Even after starting my own RE development company (primarily warehouses), I realized that the best way to raise money was to talk about risk mitigation, protecting the downside, etc. Maybe one sentence in 10 could be about how we might actually make some real money.
    That all said, Dow 36000 was full of holes from the beginning. Hassett appears very smart and he has some good ideas. I wish him well. But that book will always make me wonder. I like the idea that the equity premium has been too large historically and it has room to fall. That makes sense. Saying it will go to zero or close to zero is nonsense. The process itself would lead to unbelievable volatility.

    1. On the last point, I agree. I think ERP could decline in some contexts, but it would mostly be paired with higher risk free rates.
      On the other point, I call it the "attribution error" business cycle theory. It should be much harder to imagine the real estate sector as a source of unsustainable risk taking than it seems to be.

  4. what a fabulous year for you & marv!!! seems like you’ve been everywhere in the world and online! =) you’re amazing~ how do you have the energy/time to blog/twitter/fb so much?! i can barely even keep up one little blog without any fbing or twittering. there are so many new posts on your blog i can’t even find the skype one~ lol!Alexandria apartments