June 07, 2005

Off the Charts Real Estate Market

One of the financial newsletters I receive had some interesting numbers recently about the real estate market:

For hard evidence, Jim Grant reported some fascinating numbers in his latest issue of Grant's Interest Rate Observer. Jim says that from 1983 to 1998, housing sales stayed relatively constant, representing between 8% and 10% of GDP (the economy). Then things took off...

As of the latest numbers, home sales as a percent of the economy are at 17%. For the statisticians out there, that's 3.4 standard deviations from the mean. For the non-statisticians out there, speculation in home buying is literally off the charts.

I'm not sure I'd call myself a statistician, but I can at least understand how significant being more than 3 standard deviations off the mean is. It's not clear if the variation in home sales as a fraction of the total economy follows a normal distribution, but if it did, 3 standard deviations would include 99.7% of all events.

The author further writes:

Right now in the States, things look great... Amazingly, nobody can even remember the last time when residential real estate prices actually fell nationwide. But they still can fall...

For decades up to 1989, the Japanese felt the same way... real estate looked great, it had never declined. And then, it did for years... EVERY YEAR for the last 15 years, real estate prices in Japan have fallen.

We're not in quite the same situation as the Japanese were, but we're not that far off, either. Believing that prices can only go up is a sure way to get burned.

Posted by Tom Nugent at June 7, 2005 08:51 PM
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