Chuck Ponzi April 4th, 2005

Ok, enough for the ranting and raving. I have taken some time to pull some historical information together. This will help me explain a bit better what I mean by unsustainable real estate pricing.
First of all, keep in mind that real estate in the long run (take 100 years or more) will conform in the long run to about the median income for the local area. Median incomes typically track inflation pretty closely; it makes sense people can only spend what they make. This is not true in the short-run. Because real estate is a limited resource, people behave quite irrationally, and it is prone to stock-outs, overbuying, and overselling. Also, real estate prices do not always go up (as I have often heard from so many people), it can also go down. To show this, I have created a handy dandy little graph that compares inflation adjusted median home prices in 2 of my favorite places, California and San Diego; both of which are sorely overpriced at this point. Information for regional median house prices come from OFHEO (www.ofheo.com), and inflation information comes from the US Bureau of labor and Statistics. (I compared quarterly data with yearly CPI information, so there is no annual smoothing, maybe something for me to do in the future?) Anyway, I graphed the information and added a trendline (remember, this is about where we see long-term prices)

SoCalRE
Notice that the most recent information is quite a bit above the trendline.

Well, limited time prevents me from adding any additional opinion, but I think the information speaks for itself… Look at the dips below the trendline in the mid 80’s and mid 90’s. Seems kinda eerie that the runups took place about the same time or immediately prceding the most recent economic downturns…
Enjoy…

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