Ka-poom and house prices

[GRG55]

Re: Ka-poom and house prices

I wonder what the mean actually is, though. Looking at the chart, housing prices seem to follow the CPI pretty closely until the late 1980's, then they separate and housing starts to take off. How far off the mean would housing be if it were compared with actual inflation rather than the CPI?

Simple usually works best. Best fits straight line through the multi-decade price data pre-FIRE economy is probably plenty good enough.

[zoog]

Re: Ka-poom and house prices

I wonder what the mean actually is, though. Looking at the chart, housing prices seem to follow the CPI pretty closely until the late 1980's, then they separate and housing starts to take off. How far off the mean would housing be if it were compared with actual inflation rather than the CPI?

Simple usually works best. Best fits straight line through the multi-decade price data pre-FIRE economy is probably plenty good enough.

Or the more complicated way...;) Using the adjustment factors on Bart's website, I've plotted what I call "Estimated True Inflation". Bart usually refers to his version as "CPI + lies", and notes that it does not include all of the adjustments from John Williams' Shadowstats. It is my opinion that in this context the gap between official CPI and anyone's adjusted version of inflation does not really make much difference in regards to housing prices.

[Andreuccio]

Re: Ka-poom and house prices

Or the more complicated way...;) Using the adjustment factors on Bart's website, I've plotted what I call "Estimated True Inflation". Bart usually refers to his version as "CPI + lies", and notes that it does not include all of the adjustments from John Williams' Shadowstats. It is my opinion that in this context the gap between official CPI and anyone's adjusted version of inflation does not really make much difference in regards to housing prices.

Surprising. I would have thought there would be a much bigger difference between CPI and "true" inflation. I'd like to take a closer look at the original data. A couple of percent per year over a 20 or 30 year period should make a much bigger difference than that shown on the graph.

Simple usually works best. Best fits straight line through the multi-decade price data pre-FIRE economy is probably plenty good enough.

I disagree in principle, although if Zoog's graph is correct, it looks like you're right in practice. If the currency is debased, it's not unreasonable to expect housing prices to increase at the same rate as all other items, independent of whatever rate housing increased at previously. In this case, I'm not sure at what point in time the FIRE economy is considered to have started, but if we merely extend the line following the Case-Shiller Index from 1900 to 1975, it would give us a much lower price for housing than what would be reasonable given the high rate of overall inflation, (CPI or otherwise), post 1975. Also, using historical data for the value of the dollar in the ratio assumes that the dollar's value will continue to change at the same rate as it has in the past.

Thinking about all this, I'd be curious to see housing prices expressed in relationship to something other than dollars. I know I've seen graphs like that around here. Charles McKay did one with housing/gold, and I imagine either Finster or Bart, or both, also have similar graphs. Time to do some digging.

[labasta]

Re: Ka-poom and house prices

I'm with Grapejelly and Fred on this. 2011 looks about right for prices to bottom nominally. I'd expect an overshoot too.

I think the poom stage is initiated with a weak dollar. The government has to raise interest rates to keep the same amount of foreign money flowing in.

So, it looks like the amount someone can borrow will be restricted not just by the crap situation of the banks, but also high interest rates. So, I suppose high inflation is cancelled out by high interest rates.

My indication of a bottom would be the restrictivesness of lending by the banks. If you think the restrictiveness has bottomed out, or even getting a touch better (over at least a period of 6 months to a year in case it's false) then jump in for a purchase (if you can afford it in what will be a very crappy employment situation).

I wouldn't be too worried about finding the absolute bottom. I would think about your own situation first in terms of affordability. If you are a cash buyer then I suppose this wouldn't matter much, unless you might need the cash if your income disappeared.

My concern with the Kapoom theory, is that the government offering higher interest rates to keep foreign lending money flowing in might not be enough, as the money might not exist in the world in the first place. Creditor nations might just not have the money any more as their income is gone due to the US's bad economy. Unless, the creditors print money and inflate their own currency too, then I can see kapoom being the logical conclusion.

[World Traveler]

Re: Ka-poom and house prices

I graduated from college in 1970 and so was a young working adult in the 1970's. I was not very interested in finance or economics at the time, so I can only speak of what I remember about the world around me.

What I remember from the second half of the 1970's, when inflation really started getting out of control, was that people mistrusted paper assets - cash, stocks, bonds, etc.

Only hard, physical assets seemed to hold their value was the common wisdom of the time. And that was what people wanted - gold, silver, houses, commodities.

The interest rates paid on the "non-hard" assets, whether savings at the banks or bonds, did not match the actual inflation rate and most people recognized that.

I had a lot of friends in late '70's who bought a bigger or even more houses than they needed, because the common wisdom was that you would repay the debt in inflation-debased dollars and make your money that way...cheaper dollars paying for a hard asset that would go up in price.

Of course, the rug was pulled out from under them when the Federal Reserve pushed up interest rates to incredible heights in the early 1980's, to break the back of inflation.

It turned out that the perceived best investment strategies of the latter '70's were nullified in the early '80's, in a way that the majority of the population did not expect.

That's why I think iTulip's strategy of sitting on the sidelines right now is the best. It's just too murky right now to make long-term bets on inflation and interest rates at this moment.