"Octogenarian" <jimg2k[at]yahoo.com> wrote in message
news:1119373183.004427.91720[at]f14g2000cwb.googlegroups.com...
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In the Patch, housing booms follow high prices per barrel.

Stay tuned.

Mike in Texas

Rich Carreiro wrote:
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I see skew and kurtosis statistics frequently in empirical financial
research, especially to characterize the distribution of stock returns.
A problem is that the standard estimators are based on the 3rd and 4th
moments of a variable and are thus sensitive to outliers.

Among institutional risk managers, quantiles of expected returns are
used heavily -- that's what "Value at Risk" is.

"Octogenarian" <jimg2k[at]yahoo.com> wrote
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I think it's interesting that, according to this data, while many a boom has
gone bust, many even bigger booms were not followed by busts.

Elle,

Very good data presentation. The oil patch states had the worst
experience and still do.

Morningstar's home page at the moment has a link to an article warning about
housing bubbles. The article in turn has a link to the following one-page,
pdf file titled "Historical Evidence of U.S. Home Price Booms and Busts."

http://www.fdic.gov/bank/analytical/...fyi_table1.pdf

The pdf chart is broken down into several regions (and then many cities)
across the U.S., listing regional home price changes from 1978-2003 and
highlighting booms and busts.

BreadWithSpam[at]fractious.net wrote:
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I think it can be interesting (alongside median & mean) where in the
underlying data, there's clustering, and fractional values don't really
have meaning - ie it's a discrete kind of thing. Especially if the mode
is accompanied by the raw numbers.

E.g. How many stocks do retail investors hold in their portfolios, when
they hold individual stocks? (mode=3?)

How many children (cars, credit cards, dollars in credit card balances,
pets) does the typical family have these days in the US?

How many 20"+ fish did that $500/day guide get his clients while tossing
dry flies on impossible Hat Creek? (mode=0?)

-Tad

<BreadWithSpam[at]fractious.net> wrote
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I don't think the mean of national home prices is very helpful, either, for
similar reasons. Relatively few houses may be sold in some markets (the
coasts?), but at higher prices, while many more modestly priced houses are
sold elsewhere (everything between the coasts?), causing the mean to stay
about the same.

I propose that regional means and/or medians may be more useful. If these
have gone up in major areas (New York, California, Texas?), and then
plummet, then due to the concentration of wealth there (and perhaps a
concentration of the 20+ % of people buying houses not to live in but as an
investment), the effects may tend to trickle down to the rest of the nation.

This notion of course goes hand-in-hand with using things like the ratio of
house price:rent, but only regionally.

beliavsky[at]aol.com writes:

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Do people use skewness and kurtosis much or are percentiles
the preferred way of trying to characterize the shape of
a distribution?

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

BreadWithS...[at]fractious.net wrote:
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I do a lot of statistical analysis and reading and do not see the mode
used much. One problem is choosing the bin width -- do you round house
prices to the nearest $1K, $5K, $10K? Maybe the mode for a
right-skewed, positively valued set of numbers such as house prices
should be computed in log space.

Besides the mean and standard deviation, good statistics for
characterizing a distribution are various percentiles, such as the
10th, 25th, 50th (median), 75th, and 90th.

"Elle" <elle_navorski[at]nospam.earthlink.net> writes:

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Just to clarify, the reason folks use median rather than mean (or
what's more commonly meant when one says "average") is precisely
because of the effect you suggest. The top 49.9% of the house
prices could shoot through the sky, but the median would be
unchanged, while the mean (average) would skyrocket. Similarly,
if the few very most expensive houses took off but everything else
remained the same, again, the mean would go up but the _median_
would not budge.

Does anyone ever use mode for anything?


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Elle wrote:
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Ah, sorry. Missed the caption on the chart. I'm really batting 1.000
in this newsgroup lately.

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Never said it was. Anymore than the S&P 500, DJIA, or Wilshire 5000 for
stocks. I was just commenting on how one measures where the market is.

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I don't believe I made a comment one way or the other on housing
bubbles. I was merely asking what some common valuation measures are.


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The historical return I often see quoted for homes is 5%, which is not
out of line with Shiller's statement. On the other hand, I do have
exuberant friends and coworkers who had the real estate bug and are
stuck with properties they don't really want now.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
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I said it seems like it could be helpful. Also, that it was just one of many
indicators.

None of them are perfect. No other indicator by itself is better than a coin
flip, either.

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Of course not. The chart cited above clearly states it is showing, among
other things, real (that is, inflation adjusted) home price data.

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Median home price is not a benchmark for identifying bubbles. A rising
median may reflect simply high-end houses going for much higher prices,
while low-end houses' prices aren't changing much at all. Or vice versa. Or
a variation on this.

The consensus seems to be that there were serious housing bubbles in the
late 1970s and late 1980s. Do you dispute this? Some other index (or
probably combination of indices), and certainly not national, median home
price, for the obvious, mathematical reason I gave above, is appropriate to
gage this.

In the vein of Beliavsky's post today (June 11) are further Yale economist
Shiller observations (dated 2005) like the following:
---
The notion that home prices always go up is very strong, and very wrong.

It is true that, for the United States as a whole, real home prices were 66
percent higher in 2004 than in 1890, according to the index my research
assistants and I have put together. But all of that increase occurred in two
brief periods: the time right after World War II and since 1998.

Other than those two periods, real home prices overall have been mostly flat
or declining. Moreover, the overall increase, including the booms, is not
very impressive -- 0.4 percent a year.

Why then do so many people have the impression that home prices have done so
well? People remember the prior purchase price of a home from long ago and
are surprised at the difference between then and now. In closing out the
estate of an elderly person, one may be surprised to see that he purchased a
house in 1948 for $16,000 and that the estate sold the house in 2004 for
$190,000.

The appearance is that the investment in the house did extremely well. But
the consumer price index rose eightfold between 1948 and 2004, so the real
increase in value was only 48 percent, or less than 1 percent a year.
---
http://money.cnn.com/2005/01/13/real...shiller1_0502/

beliavsky[at]aol.com wrote:
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Business Week ran a chart a year or two ago showing how in the past,
median home price appreciation did more or less a sine-wave around the
core inflation rate - sometimes getting a bit ahead of inflation,
sometimes falling behind it, never more than about 10% ahead or behind.
And every time it got ahead, it eventually fell back. The chart ends
with a steep ramp showing prices about 35% ahead of inflation, the
highest in the entire period. And prices have gone up quite a bit since
that chart, though core inflation remains low.

I can't think of a good reason why housing would persistently get far
ahead of inflation. Aside from the circular aspect of it (housing cost
is a component of inflation calculations) it raises the question, "where
is the money coming from?" Part can be attributed to lower interest
rates, but rates have been low for a long time now.

Of course I just had my fourth conversation in two weeks with someone
talking about buying (another) property in some city they've never
visited. Prices never go down, right?

-Tad

<beliavsky[at]aol.com> wrote in message
news:1118507229.392231.176670[at]g44g2000cwa.googlegroups.com...
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One can't help but noticing the "coincidence" of demographics, here. 97 to
04 coincides with the richest and oldest boomers jockying for their
preferred retirement (and final) real estate transactions.

USA Today had an interesting piece on retirement last week, including a
graphic showing how three years after the first boomers start retiring in
2008 (presumably, 2008 is the early retirement first boomers at 62, 2012 is
when that first wave hits 65, I guess) how the number of available jobs in
the US continues on its usual historical increase curve, but the number of
available workers stays flat, creating a delta of unfilled jobs between open
positions and people available to fill them.

One can imagine that graphic being adaptable to real estate prices. After
about 2012, then number of buyers will flatten out, but available houses
will continue to grow, as the buyers want newer homes and the builders will
accomodate the buyers by building.

What's not so clear in that scenario is what happens to prices after the
boomers start to retire en masse. Will builders be able to hold their price
points in a housing market which, using gross numbers, is overbuilt, but
perhaps underbuilt in terms of the units the buyers want to buy? Will
building continue to push out into the exurbs, or will builders and buyers
reverse their paths, ripping down old and undesirerable units to build new
and desireable ones, which ostensibly would keep prices high close to the
cities, but resulting in an overbuilt condition in the exurbs? Or, will
prices drop like a rock, if the delta between new construction and old
increases to the point that you can buy an older home and gut it for a
better price than a new build?

Hell, I don't know, but it ought to be interesting.......

Mike

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Elle wrote:

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The same chart pattern appears in 1998 and 2003. Discounting 2003, this
means that this pattern is "right" only 50% of the time.

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The same pattern appears in 1984, again making the predictor good only
50% of the time. Either way, this is no better than a coin flip.

Another thought about this chart: what are they using for home prices?
This chart certainly does not follow the median home price data that
Mark gave us a link to in an earlier post. That's the most common
benchmark I've seen to measure house prices.

-Will

Will Trice wrote:
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In the 2nd edition of his book "Irrational Exuberance", Robert Shiller
devotes more attention to real estate than in the 1st edition and
provides some statistics on historical house prices in Chapter 2, "The
Real Estate Market in Historical Perspective". Figure 2.1 shows that
real home prices (adjusting for inflation) rose only about 10% from
1890 to about 1997 (I am trying to read numbers from a graph, which is
imprecise) but by about 55% from 1997 to 2004. Real house prices were
considerably lower in the early 1940s than in 1890, showing that house
prices do not always go up, at least compared to other goods.

Shiller created the index by stringing together various source of home
prices, as described in the footnotes, using data from OFHEO from 1975
to 1987 (available at http://www.ofheo.gov/download.asp ) and from his
company CSW http://www.cswv.com from 1987 to 2004 (the OFHEO and CSW
series are similar in the 1987-2004 time period). Figure 2.2 shows that
house prices in Los Angeles and especially Boston have risen much
faster from 1983 to 2004 than in cities such Milwaukee, Cleveland, and
Phoenix, where land is less scarce.

The annualized real increase in house prices was 0.4% from 1890 to
2004, using Shiller's index. Reported median real home prices in the
decennial U.S. census have risen 2% annually from 1940 to 2000, but
Shiller thinks this number overestimates house price appreciation
because it is not a repeat-sale index and thus ignores improvements in
the quality of houses.
The numbers in this paragraph are from the text, not my reading of a
graph.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
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It seems to be helpful for predictions to me. Look at 1977-1979. There the
LHPI starts reducing just before home prices begin their decline. Similarly,
from 1986-1988, the LHPI goes flat, then in about 1988 home prices decline.

I wouldn't call it perfect; seems like it mispredicts 1994-1995, for
example. I'd certainly use other valuation tools if I were trying to make a
living via strictly real estate investing.

I would like to know what makes up this index but so far, the people who
produce it seem to keep that information under wraps, to see if it passes
any kind of common sense test. Maybe someone here knows.

Michael Sullivan wrote:

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This is the first I've heard this, and it's not intuitive that this
should be so. What theory do you base this statement on?

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This seems high, my transaction costs have been half of this. Or are
you including something that's not typically considered part of the
transaction?

-Will

Tad Borek wrote:

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Public companies also use depreciation to offset income. Amortization
of goodwill is effectively depreciation and can have a massive effect on
income.

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Public companies report operational cash flow which is the equivalent of
what you've described here. For example, during the late 90's bull
market Microsoft had investments in other tech companies that
significantly increased their earnings. But these profits were not
reported in their operational cash flow since they are not actually in
the business of investing in other companies.

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The same is true of public companies because different companies have
different profit margins. Yet P/S is still widely used as a valuation
measure.

Maybe the conclusion is really that P/E and P/S may not be all that
important for public companies either? That was certainly the
prevailing theory during the last bull market, although the theory was
then used to justify outrageous valuations. I was in an investment club
at the time when one of our members got bitten by the fever and tried to
justify Qualcomm when it had a P/E over 400 right before the bear
struck. We didn't buy the stock.

-Will

<me[at]privacy.net> wrote:

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Rent, unless home prices are so depressed that the expected total cost
of ownership for 2-3 years is less than renting. Or you have a reason
to prefer home ownership that is *worth giving up money* to you.

When I bought in 1997 in CT, ownership was a no-brainer if you thought
you'd be around for a few years. Renting an equivalent space would have
cost me 1.5 times a 30 year fixed mortgage payment and built no equity.
I would only lose out by buying if the price went down a fair bit, or I
had to sell within a year or two.

Now, prices have come close to doubling since then, while rents have
gone up maybe 25-30%. It's still a reasonable deal to buy, but it's not
a slam-dunk anymore. In markets that are really exuberant (eastern MA,
NYC metro, most of the west coast), it goes the opposite way -- the
per-month cost of ownership is 1.5-2 times the cost of renting
equivalent space. That's only going to make sense if the price
continues to go up steadily *and* you hold it long term. I wouldn't
even *consider* buying in such a market unless it was experiencing rapid
population growth (a fundamental which tends to foretell continued real
estate price growth).

Generally, you can figure real estate will go up in value on average by
inflation + area population growth. Then figure your total buy and
sell transaction cost at around 10-15% of the price. If the expected
price growth over your expected stay is greater than the transaction
cost, plus what you will overpay vs. rent (and rent should also grow
roughly with inflation + pop), then buying is a good bet, assuming all
your inflation and expected pop growth figures are reasonanable.

Of course the actual value of home prices is subject to huge
fluctuations, but it will be fluctuating *around* that baseline of
inflation+population growth (relative to some reasonable current price).

Anyway, that calculation will give you a sense of whether the current
price structure is a bubble headed for disaster or just a bull market in
real estate.


Michael