I’ve been following the Case Shiller Home (should be House) Price Index for a while and decided to graph the latest New York City data. What you find when you graph the data is that house prices in the NYC area made a greater than 2 standard deviation move at its peak. Since its peak, everyone starting talking of a “mean reversion” in housing prices. What the heck does that mean?
The theory of mean reversion means that over time large swings of price tend to move back to their mean, unless underlying fundamentals of that market have changed!
That theory begs to ask ‘have fundamentals changed in the housing market?” The likelihood is no, the purchase of houses by people who can’t afford them was a result of bad lending practices by mortgage companies and don’t constitute, in my opinion, a fundamental change in the market. A house is something you live in, raise your family in, and sell either when you move, retire, or die (typically). Unless we had an influx of millions of rich immigrants looking to buy the American Dream, then the entire price appreciation of housing was based on demand fueled by cheap money created by Alan Greenspan and company.
What can we expect to happen to housing now? If the index “reverts” toward the mean, say down to 1 standard deviation, the loss from the peak of 215.83 to 156.48 would be a depreciation of 27.5%! If it continues back down to the mean at 110.72, then we’d have a depreciation of 48.7%. This is only for the New York City area, other places in the country are worse! This magnitude of loss would be catastrophic and in my opinion, create a global depression! Expect more foreclosures, further depreciation of house prices, and the creation of “Green-o-villes!”
Thanks Alan, you jerk!
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