Time for our annual look at the Case-Shiller index (data here - link to the excel file on housing data is about 2/3 of the way down the page). I have calculated the yearly index values from the average of the four quarterly index values where present, and used only the annual index values from the beginning of the data set.

Below we see the phase space portrait (four year lag) since 1894 (annual).

The housing bubble is being reinflated. The projected future trajectory of the system has been deflected away from the big area of stability (1896-1915 and 1948-1999) back towards the bubble that followed Y2K.

Sadly, it is likely to be wasted, as there is no area of stability to occupy. The most likely scenario is another bubble like the last one; one that makes people rich and excited for a brief time.

Maybe they are hoping to create an area of stability if they can force the market to a desired level and hold it there. It might work. But maintaining a false equilibrium in a self-organizing system is like maintaining the balance of a bathtub on top of a broomstick by pouring increasing volumes of water into the tub. From a distance.

Here is the quarterly chart.

It's Yellen's move. Just a couple of quick pointers--for reasons of geometry, any area of stability has to lie along the y=x line; and a move down to the 112 level on the y-axis is baked in the cake for first quarter of 2016. Whether the curve will approach the plotted point for the first quarter of 2003 or some other point will be up to you.

Below we see the phase space portrait (four year lag) since 1894 (annual).

The housing bubble is being reinflated. The projected future trajectory of the system has been deflected away from the big area of stability (1896-1915 and 1948-1999) back towards the bubble that followed Y2K.

Sadly, it is likely to be wasted, as there is no area of stability to occupy. The most likely scenario is another bubble like the last one; one that makes people rich and excited for a brief time.

Maybe they are hoping to create an area of stability if they can force the market to a desired level and hold it there. It might work. But maintaining a false equilibrium in a self-organizing system is like maintaining the balance of a bathtub on top of a broomstick by pouring increasing volumes of water into the tub. From a distance.

Here is the quarterly chart.

It's Yellen's move. Just a couple of quick pointers--for reasons of geometry, any area of stability has to lie along the y=x line; and a move down to the 112 level on the y-axis is baked in the cake for first quarter of 2016. Whether the curve will approach the plotted point for the first quarter of 2003 or some other point will be up to you.

Yo Mickey. Note the index went out of the island of stability at the exact time that the US markets went into a secular bear phase.

ReplyDeleteSo the secular equity bear was characterized by the US "animal spirit" or whatever of asset appreciation vacating the equity space and going to work in real estate. Seems logical.

But by 2006 it had pushed real estate far beyond your "island of stability", which means far too much money got pushed into real estate relative to what should have been in equities. It's now nearly corrected, but since so much money still feels the US equity space is in danger of collapse, real estate is still a little overvalued relative to where you say it should be.

But that narrative seems to prove a new secular bull market in equities has begun, no?

Here's a question for you: what does that "island of stability" really *MEAN*, in terms of a market in real estate prices? I mean, if a piece of real estate's theoretically ideal price is dependent on a premium over the cost of rent, then can that stability blob MOVE due to a secular sociological change in the accepted premium over rent, and/or due to secular economic changes in the cost of rent?

E.g., why is there a markedly different regime in the period 1915-1945? Especially compared to BOTH the period before AND the period after? What was different about the value of real estate in that time?

An answer to that might prove to be a very interesting clue about something or other.

It may be that the bull in equities is about to end as real estate goes on another bender.

DeleteAs to your question about 1915-1945, I haven't got a good answer, but I've assumed it had something to do with people's preferences between money and real estate. It began too early to ascribe to the Depression, but perhaps the Depression was a manifestation of the mind set of the time.

Maybe the imposition of a temporary income tax in 1914 was enough to scare money out of real estate, until the flood of money unleashed in WW2 changed people's mindset?

I dunno, I'd think 1915-1945 is more a long-wave sociological thing. Maybe it has to do with popularization of the automobile, industrialization of the USA, urbanization, the development of refrigeration and so on?

DeleteOr maybe it's an artefact of something going on in the world, like a change in the US interest rate regime as a result of the end of Sterling as a world reserve currency to the benefit of USD?

Or maybe it's just because there was a recession from 1913-1919, a depression from 1920-1921, then two mild recessions, then a major depression from 1929-1945?

As for predicting a new bull in real estate... yeah, I'll not worry about that til your dots start a new trend away from y=x. For all you know, we might just be building a new island of stability around (130,130). Or the location right now might just be an artefact of the tremendous bull and its subsequent tremendous collapse.

"I hate waiting"

DeleteYou will like these plots as they are closer to Phase Plots rather than lagged plots.

ReplyDeletehttp://research.stlouisfed.org/fred2/graph/?g=COU

x-y graph;

Case schiller phase plot.

Y==percent change of Case Schiller index from last year (lag) , aproximately 1/CS*dCS/dt*100 backward difference of 1 year; (CS - (CS last year))/ (CS last year) * 100.

X== Case Schiller index.

Rotates clock wise. %change in price leads price. Circles in cycle and flat line in exponential growth or fall.

House price:

Median Sales Price for New Houses Sold in the United States, Dollars, Not Seasonally Adjusted (MSPNHSUS)

http://research.stlouisfed.org/fred2/graph/?g=COW

Both in time:

http://research.stlouisfed.org/fred2/graph/?g=COZ

Note CS is lower because it aproximates a real measure rather than nominal.

But, the other is a nominal price measure.

Now, how about house price divided by nominal GDP per capita. To make it a real like measure, house price in percapita nominal GDP. That is house price divided by nominal gdp that is divided by (POP) population and adjuseted for billions and thousands by multiplying it by 1M=1B/1K.

http://research.stlouisfed.org/fred2/graph/?g=CP1

http://research.stlouisfed.org/fred2/graph/?g=CP8

Phase Plot of Same.

http://research.stlouisfed.org/fred2/graph/?g=CP6

It usually rotates clockwise. % Change in price leads price.

Here is a plot since 1995:

http://research.stlouisfed.org/fred2/graph/?g=CP9

The latest point is about (5 times gdp per capita, 7%).

Note it must be hard for earnings to keep up with per capita gdp.

Thanks for the plots. I have been too busy lately to keep up with this topic, as I am prepping for a move.

Delete