Friday, April 23, 2010

Is now a good time to buy a home?

No. Maybe.

One correction for David Leonhardt. He writes:
Markets often overshoot, on both the upside and downside.
Actually, financial markets often overshoot on the downside. Real estate markets don't.


  1. "Actually, financial markets often overshoot on the downside. Real estate markets don't. "


    Take a look at the chart on the right. Notice the curve goes above and below the trendline. These look like downside overshoots to me. Please clarify.

  2. "Take a look at the chart on the right. Notice the curve goes above and below the trendline. These look like downside overshoots to me. Please clarify."

    Meh, looks more like a margin of error thing to me...

  3. nonpartisan said...
    "Take a look at the chart on the right. Notice the curve goes above and below the trendline. These look like downside overshoots to me. Please clarify."

    A trendline shoots through the middle of a trend simply by definition. You can see this especially well with the red line. If the line goes above the trend, then it must go below it as well, by definition. A trendline is really just an average combined with a slope, and an average is by definition ... well ... average. (A reminder, the trendlines on my graph are PRE-BUBBLE trendlines which are then extended out to the present. They don't count prices during the bubble period.)

    Perhaps I should have phrased my language differently in my post, but let me try to explain what I was trying to say. Notice the blue line, the line of nominal home prices. Although the line goes below the trend, it never actually goes down in absolute terms when it is below trend. The blue line was below trend in 1974-1978, but prices didn't actually go down during any year of that period. Prices in 1975 were higher than in 1974, prices in 1976 were higher than in 1975, etc. A similar thing occurs in 1993-1998. Nominal prices fell below the trend, but they didn't actually go down during any year of that period. They simply stagnated or rose slower than the trend.

    I expect that a similar thing will happen this time. As nominal prices get close to the trend, they will simply stagnate rather than fall in absolute terms. If they end up below the trend, it will simply be because the trend is upward sloping.

    Of course, I could always be wrong. Back in 2001, I never would have believed that the housing bubble could have gotten as big as it eventually did.

  4. I am quite knowledgeable in technical analysis of market charts. All trend lines and moving averages are based on historical price, and are never indicative of future price events.

    One cannot build a profitable trading system based solely on trend line or moving average price overshoot.

    That said, trend lines and moving averages are only good for determining market direction. In a bull market, you buy on the dips. In a bear market, you go short on the rises.

    Trying to time the exact bottom of a market will get you creamed. Never try to catch a falling knife. Always wait for the trend change confirmation before getting back in. In this case I would also wait for employment numbers to begin rising again (that is, real employment numbers and not govt-supplied ones) to ensure the confirmation before entering the market again.

    Employment numbers and home prices are inseparable and should never be analyzed separately. Get your real employment numbers at

  5. I think the main point is that there is a difference between the stock market and the real estate market. The stock market is a lot more sensitive to sediment and speculation. Prices are based on how people feel at the moment and can move heavily with momentum. A stock can gain 50% in a week because the price is just based on what people THINK it's worth. The stock market is highly sensitive to manias. Demand for a stock can easily double because people can jump on the wave. This shouldn't happen in the real estate market because a house is a tangible asset.

    In a NORMAL real estate market (normal lending standards and no gov't subsidies), the price tends to reflect the actual value more accurately than a stock. It may overshoot on the upside or downside, but not by huge percentages. People can afford what they can afford, and that dictates the price. The only reason we had such a huge overshoot on the upside is because people were given loans they NORMALLY would not have qualified for. It was artificial demand.

    The house I grew up in sold for 125k in 1998. It's now on the market for 345k with no significant renovations. (I live on Long Island, NY). The market here is still tremendously overinflated. Unless the avg income has tripled in the last 12 years (it hasn't even come close), that house should NOT be that price. It was inflated by artificial demand.

  6. James, a market is a market, and markets overshoot and undershoot as a matter of their nature. That's what gives us bubbles and crashes. Markets are measured by prices, and prices are determined by what people are willing (or able) to pay.

    Housing is a market.

    Using a pure definition of market price, the selling price is never over or under where it should be. The most recent sale is always perfectly priced for the market at that moment.

    I love your blog, and we've disagreed on this in the past, but let me offer this argument: The housing market bubble demonstrated the market overshooting what housing is worth, and the crash is the same thing on the downside. Where we draw the trend line is immaterial to the bloke who is $300K underwater on his loan.

    Chris' comparison to the stock market is apt. Housing moves at a glacial pace compared to stocks, and few deals are cash, lenders and appraisers influence prices along with the buyers.

    This is the third housing bubble I've lived through -- I hope that people take notes this time so we can avoid this nonsense in the future.

    Absolutely no chance of that happening. The next greater fool is always just around the corner.

  7. Hi Chris Fullam --

    I feel you are onto the right path, but you are missing some things.

    In the world today, all markets worldwide are subject to government and central banker (UN/IMF/BIS) manipulation, to help achieve political goals. This has already been proven from a statistical analysis perspective, but I won't get into it here.

    The way the manipulation works is that it uses a combination of news events (real or fabricated) and technical junctures in price/volume within a market, to intentionally "push" the market one way or another.

    The dot com bubble and the housing market bubble were both intentionally created for political reasons. That said, technical analysis still works to a large degree and should never be ignored. And trend lines are still based on historical price, at the end of the day. If you want to make a case for a market low, use STOCHASTICS.

    Anyone can use leverage to buy a home or a buy a stock. How much do you want to borrow from family to put down a downpayment? The money can come from anywhere -- a loan, a credit card, family, a margin account, etc. You can sell your car or a diamond ring to get your money.

    Due to the ready availability of borrowed money, all markets should be treated the same. What's different is the timing and goal of the political agenda, behind the manipulation. It pays to never just follow mainstream media in the USA, for this reason.