There’s yet another great housing chart from wcw today:
If this line reverts to the long-term mean, the extra evaporation of housing equity would be utterly devastating. But is there any reason to believe that it won’t?
Felix Salmon
unpredictable and ornery, like a good wine
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5 comments so far
Felix, not to oversimplify, but doesnt the correction you indicate here return the real estate markets to the long-term trend? Wealth and sustained economic activity are generated through investment productive assets, not flipping real estate. As for the devastation you cite, perhaps its best we realize up front that we were scratching a prank lottery ticket and move on. Good blog, by the way. I love it; read it every day.
- Posted by KenIn much of America, houses were much smaller during the first half of the chart than they are today. The rise of dual-income families and the secular decline in mortgage interest rates allowed families to invest a greater amount in their homes (for good or for ill). Those two trends seem to be generally hanging in there.
Ergo, the value of housing stock as a percentage of the economy can sustainably remain at a much higher level than was the case in the 1950s-1970s.
That\’s not to say that 160% was the correct level (that level reflected overinvestment in housing and inflated prices) or that we will trough at the current level, but it also doesn\’t mean we necessarily have to revert to 90% or whatever the mean value of this chart is.
- Posted by SeanDCTo echo, somewhat, the other comments, my eyeball best-fit of a line to that data isn’t a horizontal line (i.e., a mean), but a slight upwards trend. Just estimating, it looks to me like the trend line should put us, in 2009, at about 120%, which isn’t too far below where we are now.
Of course, the steepness of our current trajectory could mean that we will drastically overshoot (undershoot?) on the way down, so…
So don’t call me an optimist.
- Posted by Bob MontgomeryInteresting graph. I tend to think alongside Ken’s comment: somehow, people need to realise that growth comes from investment in productive assets. Therefore, intuitively, I would see the long term figure below the 100% mark.
- Posted by Pierre HenriI find the comment on dual income households a very good one, but would have drawn a totally opposite conclusion: surely, if both husband and wife of a same household (sharing the same house(s)) work, this should increase the GDP relatively to the households real estate assets, except if one assumes that most of these dual income families have started investing in a secondary residence (which seems unlikely for the average household).
If you draw a straight line to approximate the (slowly rising) mean, aren’t we now pretty close to it?
- Posted by thorsteinveblen