Thursday, April 13, 2006

Guessing the housing revaluation

Yes, I think there's a housing bubble. Or to be a bit more accurate, there are a lot of bubbles in the US of varying size, most of which are at least somewhat connected. That's a bit different than the stock bubble which was basically over one area. But I digress.

For the decades prior to about 1996, median new house prices tended to increase in line with inflation, adjusting for size of the house. (A 2000 square foot is worth more than 1500 square feet regardless of inflation, and median house sizes have been creeping up as well. But I'm going to ignore that for a now.) In 1996, median new house prices increased at levels well above the rates of inflation - nationwide at about double the rate, and some places at rates... right.

Anyway, I have an idea as to where we'll see housing prices go when the bubble(s) pop. Find the price of comparable property in 1996 and add 34%. 34% is 3 percent inflation per year for 10 years compounded, and gives us a decent ballpark. Add1 percent per year the house was built after 1996. So if a house was 100,000 then it's probably "worth" 134,000 now. If a house which in 1996 would have been 100,000 was new in 2001, it's got a nominal base of 139,000 - 34% plus 5%. Is this perfect? no. Is it a workable guess? I'm going to run with it.

Nationwide, new house prices have increased some 55-60% since 1996. That means nationwide we're looking at about a 20% drop - or stagnation in growth till the "natural" price catches up. If, that is, the bubble pops. And in a 'perfect' world.

Personally, I think the actual adjustment will depend on the severity of the pp. If it's a pinhole leak - in most ways the ideal solution - what'll happen is that house prices will increase at rates less than inflation. And - I think - they'd not bottom at the 'natural' price but rather a bit above it. On the other hand, if the prices deflate - go negative - it'll definitely reach the natural rate and probably go a bit past it, only to climb again. Again the extreme is a severe plunge - say, 50% of total cost in a quarter - in which case the climb back will stabilize below the 'natural value'.

How severe is the pop going to be? That's the big question, really. In my opinion it depends on how many distractors are going on at the same time. The more balls in the air, the more likely this one gets dropped when something else gets priority. I've more on that in an upcoming post.


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