Tuesday, July 31, 2007
Still thinking about Case Shiller.
I've been getting some emails about when I think Los Angeles prices will drop and how far (as if I know!). All I can tell you is that I've been basing my gut feelings on the Case Shiller index and so I kind of graphed it out above (click graph to enlarge). The blue line is the actual CS index for Los Angeles. The redline is my half-hazard attempt at graphing out what the normal growth would've looked like if there were no booms. (I fully admit that my methods are less than scientific, but I still think they have at least cocktail-party-chat value). I'm sure there are people who would've drawn that redline more steeply and others who would've drawn it less steeply. I was attempting to graph from valley to valley in the cycle.
You can see that in the last boom it took approximately 3 years to peak and 6 years to bottom out. At the low point, homes didn't roll all the way back all the way back to pre-boom pricing; they rolled back about 50%.
Depending on how you look at the current boom (what I like to call the "Great Boom"), you might say it will take six years to drop 50%. That would assume that you believe real estate follows certain fixed cycles that are not dependent on the individual boom. Or you might think it will take twice as long to bottom out as it took to peak, assuming you think real estate follows a trend that is dictated by the boom itself.
To me, the interesting aspect of this graph is that the current boom peak didn't lie flat as long as the last boom. It also climbed at a much faster clip. This could indicate that our current boom is more volatile and will fall more quickly than the last. I think I subscribe to this faster-collapse theory because of all the fraud that went on in lending. I believe the fraud is more widespread than say the volume of aerospace employees who were laid off in the 90's.
The point on which virtually nobody disagrees, is that the current pricing is unsustainable. There's just no reason to pay three-quarters of a million dollars for 1,700 sq. ft. tract house in the Valley. Don't do it, People. That house will easily be sold for $400k in the next year or two.
As for E & I, we might jump in before the market totally bottoms out. But we've definitely decided that we won't buy before summer ends. And it seems unlikely that we will buy before the holidays are over. I am still looking everyday because I think it's important to have a strong knowledge of the market and value -- but I am still not seeing the kind of value that I believe is sustainable.