Do You Believe in Regression to the Mean?

Tuesday, June 12, 2007
Much has been made lately of falling housing prices and their negative effect on the American economy. What isn't mentioned so often is that the areas that are seeing some declines in prices now are typically areas, such as San Diego, which saw 25% rises in prices during several of the last few years. The link takes you to housing price year-over-year changes in twenty US markets. While it is undoubtedly hard on marginal buyers to see interest rates rise, it is probably much harder on them to watch housing prices skyrocket beyond the means of all but the most well-endowed Trustafarians.

The question going forward is whether we have seen the worst or whether there is more bad news to come. I have watched Jim Cramer call the bottom of the housing market at least twice now since last summer. The chart below may help to concentrate your mind, depending on your answer to the title question.


Knucklehead said...

What this chart tells me, if I'm reading it correctly, is that home values rarely qualify as particularly interesting financial investments. If you're lucky enough to get in on one of the rare "bubbles" such as over the past 10 years or the mid-40s to mid-50s, your home will increase in value enough to be considered an investment. Even then you have to be in the right location.

Over the long run your home - if you tend it properly - will keep you warm and dry and, should you sell it, get you back more or less what you put in. But it won't make you "Real Money". Unless, of course, you leverage, flip, upgrade and such.