Saturday, December 20, 2008
Notice that during the early 90’s housing bubble, that there was not a rapid expansion of credit as can be seen by the case-Shiller index staying relatively flat.
Also Notice the precursor to the current bubble; the Case Shiller Index starting a rapid rise in 1998.
My question is what was the trigger? the Gramm-Leach-Bliley Financial Services Modernization Act ( this act removed The portion of the Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services) wasnt passed until 1999 when a rapid rise in the case-Shiller index had already occurred. perhaps a secondary effect of the Dot.com bubble?
Another question is: Is the case-Shiller (CS) data adjusted for inflation in some manner? if the CS data is adjusted for inflation then we have a very long way to fall to get back to historical norms.
IF it is not adjusted, i treated the value of the CS data as a dollar value and used the online BLS calculator to adjust the the 1998 CS value (approx 8000) for 2008. That adjustment comes to approx 10,500.
While this method is certainly not rigorous, i figured that it would give me a rough estimate since the CS value is ultimately based on the dollar value of home sale transactions.
The NY CS index is currently at 19,000. A reversion to mean , using the rough inflation adjustment i described above would give us a target of 10,500. However a reversion to mean usually overshoots.
I extended the trend lines for the CS data on one of the charts at the link above, As a VERY rough estimate, if current trends continue, then the CS Composite-10 could see a bottom in 2012. But if the area covered by the CS NY data continues on its current trend then it wouldn’t bottom until sometime around 2017.
One argument we have on this blog is how well (or not0 the NY area will hold up during the RE deflation. I argue that we will see a big drop in the next 2 years and that the NY area will come into line with the CS composite 10 and CS composite 20. Data for the last 20 years show that the NY area has NOT been substantially different from the other 2 indexs. The difference has only arisen lately, since about 2004.
i argue that this divergence is due in large part to the inflation of the financial services industry in the Ny area and the huge amounts of cash that were pumped into regional housing as a side effect.
i think that the Ny region will see a bottom before 2017 but after 2012. My guess is the NY region will bottom sometime around 2014 and then stay stagnant for a long period.
The driving factor that allowed the price divergence in 2004, the huge amounts of money loaned out by the banks with little to no regard for the quality of the loan, and the sky high salaries seen around the region will not exist to support the divergence anymore
my 1.25 cents
have fun tearing it apart!