Minyan Mailbag: More Real Estate Perspective
I'd settle for a semi-semi-bubble-bubble
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.
First - welcome back to the Ville.
As for Shiller, I think it is important to draw a distinction between identifying a bubble and predicting when it will pop. I use Mr. Tuttle's excellent chart with my clients and remind them of the infamous speech Alan Greenspan gave in December 1996 when he uttered the words "irrational exuberance". Of course, when I look at Mr. Tuttle's chart his words were very accurate based on valuation, as the market had only EVER traded at a higher multple than existed at that time during the bubble and aftermath of 1929. This is a perfect lesson of the difference between identifying a bubble and getting the timing of the end correct!
Jeremy Grantham's recent commentary on the GMO website is an excellent tutorial for those interested in some historical context on bubbles. I believe Mr. Grantham has an actual empiral way of measuring a bubble - rather than the adhoc way that most people seem to be throwing the phrase around these days - price levels that are 2 sigmas from their long term trend. He also indicates that his research team has only identified 27 occurances historically (excluding the current equity bubble), with all bubbles eventually reverting to the mean. Currently, the NATIONAL median home price as related to household income is 2 sigmas above the long term trend. So at least by one empirical standard the national housing market is in a bubble....on average (he labels it a "semi-bubble"). When and how it is resolved is anybody's guess but Mr. Grantham does a good job of framing the debate and does some forecasting using reasonable assumptions.
Minyan James Dailey
Thanks for the added perspective Minyan James!
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