Sunday, September 09, 2007

Schiller, Inflation and Hedonics

You've all seen "The Graph," done the double take and decided we are totally screwed. In a rare break with the bears let me go into a little of my reasoning why "The Graph" is wrong. There are 4 general adjustments I will make to "The Graph":
• vertical scale 0-200 rather than 60-200
• inflation using the old metric rather than the BLS CPI as adjusted
• hedonics
• date range

Then for something completely different, a look at housing prices as a percentage of monthly income (two ways, regular income and regular + investment income).
For today however The same graph with a true vertical scale:

Depending on chores I may get the shadow inflation graph discussion up this afternoon, or not.


wagga said...

Do your chores first, then we want to see some more.

Edgar said...

You didn't leave any room at the top for more growth. 0 - 400 would be better. To the moon!

Rob Dawg said...

Didn't it top out Q3 '06 at something like 205-207?

Lou Minatti said...

One thing Schiller doesn't account for is house size. Modern houses are much larger than just a few decades ago.

Moreover, there is no such thing as an "equivalent standard house." A house built in 1890 was a collection of wood and nails. (The awesome restored Victorians we see today were very much the exception, not the norm.) A house built today has complex systems built in, such as plumbing, wiring, heating and cooling. 110 years ago most Americans lived in either crappy farmhouses built by hand by the owners themselves or in tenements. Again, no equivalence.

The last leg up still doesn't look right to me. US housing prices haven't doubled in the past 5-7 years. Some areas have tripled in fake value, grossly skewing the national average.

I'd like to see Schiller's chart done on a state-by-state basis. That would be more meaningful.

Rob Dawg said...

House size and quality are part 3; Hedonics. It was 1940 before half of all homes had a full set of indoor plumbing.

And don't judge 1890s houses from the ones that survive today either. You anticipate my points.

As to the last leg up. Yes, it doesn't look right but it also uses inflation indices that don't reflect reality. Part 2 will use the CPI prior to 1990 and show the power of compounding.

Sac RE Agent said...

dawg, i'm looking to the additional charts with the variables added. and like lou said, i too would like to see this chart by states.

Rob Dawg said...

Sac RE et Lou,

The problem with States is doctorate material. Just what would you use for the typical 1890s house on Arizona say? And 1890s California was essentially two entirely different states plus some various territories.

In part 4 I'm going to address the time frame by using 1940-2000 Census summaries because let's face it century old housing is an anachronism in the modern world. Most is gone, what survives is modified beyond comparability.

I am reminded of my dad getting the 1920 Buick judged. One judge was going to take off points for modern insulated ignition wiring. My dad politely pointed out the rules specifically exempted health and safety mods. Anyone want asbestos fiber pipe insulation in their basement?

I'll do more but I have a feeling state by state would look too disaggreated.

Tyrone said...

The latest from Purva:
It is my belief however that they will be laughing all the way to the bank when this market turns. And I will be the first to congratulate them. I'm so proud of clients that know what they want and go for it even in the face of fear.

I'm sure they look forward to the contratulations in 20 years.

Lou Minatti said...

This guy has laboriously done tons of charts for metro regions:

His stats go back to 1975, which I think is a useful amount of data to work with to establish trends. This chart is interesting:
Nevada prices stayed below the inflation-adjusted base until 2003, when it seems that suddenly everyone in Nevada lost their mind.

Rob Dawg said...

Lou, two problems. Explosive growth dramatically shifts the median hous. all of a sudden it is newer and larger. Second. look at the inflation "curve" since 1975. I seem to remeber 17% in 1978-79 and 2-3% in 1990-91. Do you see either in the inflation line?

Yes, I too have that site as a resource but in addition to the above issues there's also the OFHEO biases to account for. None of these are fatal but they do muddy the waters.

Akubi said...

Breaking hedonic news flash!!!
The Philly cream cheese angel unwrapped. Woohoo!
A Little Taste of Heaven!

Edgar said...

@ Rob: Didn't it top out Q3 '06 at something like 205-207?

Relax, I was just razzin' ya.

Rob Dawg said...

Relax, I was just razzin' ya.

No worries mate. We've cleared out the riff-raff. I can take anything the cream of the crop wants to throw at me.

incessant_din said...

Here's another source for OFHEO plots:

For CPI-U data regionally, here is the source, select from "Regional Resources" on the right hand side:

It turns out that on the log scale the data for CPI does look pretty close to the one that they plotted, even with 13% in 1980. The house price appreciation really has been that insane. And I do believe that they are cooking the inflation numbers lately, but that only buys you a couple of percent. Gold bugs might want to plot home prices versus gold prices to correct for monetary growth. I think the result will be very similar.

Son of Brock Landers said...

@rob dawg
thanks for showing a classic lesson of basic econ courses, you can make data look however you want it to look in a graph. setting the baseline to 0 does change the look. i'd love to see this done with the foreclosure graphs that have shown what looks like an astronomical growth pattern. I like Shiller's work, but I think his index 10 city index should not be used for showing the national picture. His 20 city index is better, and even then it leaves out a lot of the population. i'm a housing realist, don't throw tomatoes yet. i just feel that the media is doing their usual scare tactics to get people freaked out. Nice post, look forward to the other graphs.

Edgar said...

Old news:

Peripheral Visionary said...

Probably also want to use a log scale rather than a linear, but that's probably already on your list.

The house sq ft adjustment is important, but also important--and impossible to account for--is lot size and (of course) location. Averaging across a lot of sales may smooth some of that out, but it doesn't fully take into account trends, like the super-tiny lots many new houses are built on vs the more generous lots for older homes.

Peripheral Visionary said...

@TK (from previous topic):
Concerns about the size of FNM's and FRE's portfolios were front and center in the economic debate a couple of years ago. The result was that they had caps put on their retained portfolio, and have had to adhere strictly to the limits on the loans they can take on rather than soak up a lot of trash. The hard caps on the size of the loans they can take (~$250,000 for most regions) has kept a lot of trash off their books.

The current head of OFHEO, Jim Lockhart, is widely believed to be unfriendly toward the GSEs, and has maintained the portfolio limits(finally, a Bush appointee who knows what he's doing . . . ) Of course, Jim Cramer (among others) hates the limits that have been placed on FNM/FRE, and is trying to rally the financial industry to pressure OFHEO to lift the caps on FNM's and FRE's portfolios. That, of course, is so that the GSEs can take on the trash loans that Wall Street is desperate to unload. Unfortunately, the Senate Democrats are also on board that effort, as they see it as a way to quietly bail out Wall Street and borrowers. But Lockhart is standing firm for now, let's hope that lasts.

Relevant link:
Big Players Call On OFHEO to Rethink GSE Decision
"Several key players have rung in on the decision by the Office of Federal Housing Enterprise Oversight (OFHEO) to retain limits on the mortgage portfolios owned by Freddie Mac and Fannie Mae.

"The two government sponsored enterprises (GSEs) had petitioned OFHEO, its regulator, last week asking to be allowed to raise those portfolio ceilings in order to offer some relief to lenders in the current mortgage credit crunch. Both the head of OFHEO James Lockhart, III and President Bush stated that the GSE's should clean up the remainder of their accounting problems dating back to 1994 before they are allowed to increase the size of their portfolios. The President also said that the free market was better suited to handling the current crisis than were Freddie and Fannie."

Sac RE Agent said...

dawg, what's up with the delay on getting this graph/info together? your buddies john and purva have already assured us that all is well. why would we need some economic details to substantiate what they're already telling us?

TK said...


Thanks for the info. The pressure on the OFHEO to share in Wall Street's pain and quietly bail out the borrowers, I don't know where that's coming from. The vast majority of the public is against a bailout. Frankly I'm secure in the knowledge that despite all of the other spending fiascoes our Govt. is responsible for, at least they're not exposing us to a tsunami of defaulting fliptards.

I saw Cramer this morning on TV saying we're running the risk of recession and it's all on the Fed to "fix" things. The Fed isn't flying blind anymore, he says, and so they should do the right thing.

He did compare the conditions in today's market to be frighteningly similar to '87. Run for the hills.