Although the country as a whole is slightly undervalued according to MacroMarkets—with some cities such as Atlanta, Cleveland, Detroit, and Minneapolis substantially undervalued—two sections of the country are still overvalued: Southern California and the DC-to-Boston megalopolis.
The chief economist for MacroMarkets LLC is Robert Shiller.
Update: In the comments, Boston Bubble makes some good points:
I actually think your graph is better, given that you adjust for inflation before determining the trend whereas MacroMarkets only calculates a trend based on nominal growth. Inflation has varied dramatically over the years and that will necessarily distort any trend calculation based on nominal prices. I see that the MacroMarkets chart doesn't go back far enough to hit the Great Inflation of the 1960s - 1980s, so maybe it's not as big of a deal as it could have been, but that's another reason that I would trust your trend line more, because it goes back further.I think it makes much more sense to measure the trend after adjusting for inflation. Most of Robert Shiller's research on housing prices looks at prices adjusted for inflation. However, as far as I can tell, the MacroMarkets "Gap Gauge" does not.
Also, my trendline measures the trend from 1970-1999, while MacroMarkets uses a trend period of 1987-1999. Thus, they are only using a 13-year period to tell you what prices should have been over the following decade. I use a three-decade period to tell you what the prices should have been over the following decade.
To MacroMarkets' credit, they use a very slightly upward curving trendline, while the trendline I use is perfectly straight. I originally tried to use a slightly upward curving trendline, but the result Microsoft Excel gave me was nonsensical. I also have a graph (not online) that compares home prices to rents. The rent line looks very similar to my perfectly straight trendline.
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Wow, thanks for the link to the charts. Housing is in even worse shape than I thought - look at the difference in the area under the curves, above and below the trend line...that big bubble of the last few years is still totally unbalanced. The overshoot to revert to the mean is going to be wicked. Ouch.
ReplyDeleteJust an example, in this case Shiller speaking to the CFR:
ReplyDelete"And also I think we have to increase our regulatory scopes and vigilance. We have to unite the different agencies that regulate mortgages."
"SHILLER: I was impressed. Alan Greenspan gave a talk at Brookings last week, and I was impressed that he said almost exactly what -- he said that the bubble --
TARULLO: That may not be entirely coincidence.
SHILLER: Bubbles -- this is Greenspan; I don't remember the exact words -- but bubbles are essential to -- they're big and we can't avoid them. And then he, of course, absolved himself by saying there's not much we can do about them except maybe pick up the pieces afterwards.
I was surprised to hear them say that they're so central to the way economies work."
...Just telling them what they want to hear, so they can have a good story to tell about why they needed trillions in taxpayer money.
http://www.cfr.org/publication/14193/world_economic_update_rush_transcript_federal_news_service.html?breadcrumb=%2Fbios%2F134%2Fdaniel_k_tarullo
I actually think your graph is better, given that you adjust for inflation before determining the trend whereas MacroMarkets only calculates a trend based on nominal growth. Inflation has varied dramatically over the years and that will necessarily distort any trend calculation based on nominal prices. I see that the MacroMarkets chart doesn't go back far enough to hit the Great Inflation of the 1960s - 1980s, so maybe it's not as big of a deal as it could have been, but that's another reason that I would trust your trend line more, because it goes back further.
ReplyDeleteI know looking back gives us context, but I'm not entirely sure that extrapolating past trends is necessarily a full picture. Could we possibly say that folks view housing in a fundamentally different way than they did before, say, the 90's? That people view real estate as a legitimate investment, not just a place to live? Might this have a lasting effect on prices that pessimists are not accounting for?
ReplyDeleteIf not that shift in attitude, what about the development to saturation of credit scores, ratings agencies, and the availability and use of credit that allows consumers to borrow against future earnings and smooth their consumption over time? I know it might sound silly right now after the wringer housing has gone through, but could it be that there is indeed some kernel of fundamental change at the heart of what became the housing bubble?
I certainly feel confident that people are being drawn back into cities, which helps to explain the still "overvalued" real estate in the DC-Boston megalopolis.
I certainly feel confident that people are being drawn back into cities, which helps to explain the still "overvalued" real estate in the DC-Boston megalopolis.
ReplyDeleteUh-oh! Do not sneer at "The Mean"! All will Revert to The Mean in time!
(The Mean, of course, meaning "1991")
Shouldn't people being drawn back into cities cause rents to rise at similar growth rates as purchase prices?
ReplyDeleteI'm afraid I don't know the data--have rents not grown in cities? I would certainly suspect they've grown more rapidly than purchase prices over the last 5 years or so. But I suppose that is a hedged bet, knowing that housing prices have taken a crap.
ReplyDeleteAheh...the DC graph shows a whopping 21% overvalued from "baseline trend".
ReplyDeleteI'm only familiar with Boston, so I will speak to that. Rents have grown, but at a slower pace than housing prices. Yes, the price to rent ratio has been falling for the last 5 years or so, but it had risen so much beforehand that it is still higher than average. At least that is the case when using the S&P/Case-Shiller Index for Boston and the U.S. Bureau of Labor Statistics rent series for Boston-Brockton-Nashua. Interestingly, the deviation of the price to rent ratio is in the same ballpark as the "gap" in the MacroMarkets chart for Boston.
ReplyDeleteI suppose we could expect rent prices to be more sticky though, since there may be some regulation in place as to rent increases. And I think we could also say that the market for rental units is more robust and the consumers more flexible, keeping the market somewhat more competitive...? I was in Boston 1993-1997 and visited regularly after--I perceived the rent increase just after I left to be a friggin wicked explosion. But, I live in DC now and live with roommates--it's hard for me to see how other folks justify the high rents, so maybe I'm just crotchety.
ReplyDeleteI think of the changed psychology around real estate as an older trend (10 years...?) and the renewed interest in city living as a more recent (last 5 years...?) one.
A question for James: your trend lines indicate they represent "pre-bubble" prices. Won't your selection of the last data points before the "bubble" have a significant impact on the slope of your trendline...? How did you decide where to stop...?
"I suppose we could expect rent prices to be more sticky though, since there may be some regulation in place as to rent increases"
ReplyDeleteI believe rent control in Massachusetts was lifted in 1994, so I don't think that has been a factor for awhile. In fact, if anything, the lifting of rent control should have given an extra boost to rents as they had been artificially constrained before (hence the "friggin wicked explosion"). And yet, even with this extra boost which should have caused rents to outpace house prices at least for awhile, the price to rent ratio actually started climbing around then. Yes, rents exploded, but prices exploded even more so.
"And I think we could also say that the market for rental units is more robust and the consumers more flexible, keeping the market somewhat more competitive...?"
I think that reinforces my point. Renting is a more liquid market, and so it's actually a better gauge as to what extent people are being drawn into a city.
"friggin wicked explosion"
ReplyDeleteSpoken like a true Bostonian :)
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ReplyDeleteDC Rents trending upward:
ReplyDeletehttp://www.rentjungle.com/rentdata/average-rent-in-washington-and-washington-rent-trends/
This is in the face of a flood of new units as condos are converted to apartments in the wake of the housing downturn.
Oboe, could you explain why here in Arlington I haven't had a rent increase in the last two years?
ReplyDeleteMaybe because not every single situation, in and of itself, is indicative of the trend for rents within 10 miles of Washington DC?
ReplyDeleteJust a guess...
Oboe, could you explain why here in Arlington I haven't had a rent increase in the last two years?
ReplyDeleteIf people are having more sex in the US, why am I lucky if I get it once a week???
Or what anon@11:41 said...
So oboe, that fact the I live in the Clarendon section of Arlington--might I add one of the most sought after areas to live in Alrington--doesn't cast doubt about what is purported in your source http://www.rentjungle.com/rentdata/average-rent-in-washington-and-washington-rent-trends/?
ReplyDeleteOboe, you cite www.rentjungle as your source. Is that your web site? If you are going to participate in this blog and have any credibility, I would perfer that you cite reputable sources and not jungle websites!!!
ReplyDelete@2:33:
ReplyDeleteNope. And if you've can find numbers that contradict the link, do so. Otherwise, don't shoot the messenger.
@2:21:
ReplyDelete"If people are having more sex in the US, why am I lucky if I get it once a week???"
I forgot to add that I dress quite nicely and make a decent salary!
Sigh.
You understand that rent growth doesn't necessarily track "most desirable neighborhood", right? It's a bit more complicated than that.
@2:21:
ReplyDelete"If people are having more sex in the US, why am I lucky if I get it once a week???"
I forgot to add that I dress quite nicely and make a decent salary!
Sigh.
You understand that rent growth doesn't necessarily track "most desirable neighborhood", right? It's a bit more complicated than that.
Poor oboe...I really rattled you so much that you are in a posting frenzy.
ReplyDeleteHeh. Yep, I'm all verklempt...
ReplyDeleteSorry for the double-post.