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Dec 2, 2022Liked by Peter Nayland Kust

Case-Shiller is still at ~300. IMO, anything over 200 is bubble territory, meaning we have a long way down. It wouldn't surprise me if we hit 150 before this is over, but it will take a number of years to get there.

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If we take a longer view of the index, we see that the pre-2008 bubble began roughly in late 2003/early 2004, peaked in 2006, and finally burst in 2007, precipitating the derivatives crisis that metastasized into the 2008 Great Financial Crisis liquidity shock. The decline took most of the 2008-2009 recession, with the index bottoming out in late 2008 or early 2009.

https://fred.stlouisfed.org/graph/?g=X6CZ

In that same perspective, we see a clear inflection point in the index in the summer of 2020--the sudden impetus for remote working and working from home spurred a revaluation of one's address, and there was increased interest in homes away from major urban areas, bidding up home prices as a result.

Like all price indices, the Case Shiller index has been rising since its inception, and so the threshold for being a "bubble" has also risen (although to where is debatable). Certainly we cannot rely on the behavior of other indices, as the consumer price inflation rate does not track with the growth in Case Shiller, nor can we use the growth of the M1 and M2 money supply metrics, for the same reason.

https://fred.stlouisfed.org/graph/?g=X6Fk

However, when we look at the percent change year on year in the index since 2020, there was a sign of beginning moderation in the index last summer, but by October the percent change was rising again. This was after the lockdowns and the pressures to work from home had ended and were beginning to reverse, and so the summer moderation is a predictable outcome of that moderating house-buying trend from 2020 and early 2021.

Arguably, this could be the beginning of a speculative bubble, at which point the Case Shiller index was around 270-280. Certainly the index has to fall to at least that level to wash out the effects of bubblemania.

Lower than that is a bit more problematic.

There are those who argue that the shift to remote work/work from home is an enduring phenomenon, that people by and large don't want to return to an office, at least not all the time. As a cultural shift, this puts a permanent increased in the perceived value of one's home, which would be reflected by a structurally higher price structure for housing and thus a higher level on the Case Shiller index.

If that cultural trend does not prove to be a lasting phenomenon, then the deflating of the housing bubble could take us all the way back to the price levels of early 2020, in which case your estimate of 200 as the threshold for bubble territory is proximately correct.

The definitive bottoming out of the housing bubble will be when housing starts pick up enough and housing activity increases enough to first stabilize the index and then move it (slowly) back up again. Where that bottom level is is at this point indeterminate, although I don't think we are anywhere near it at this point.

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Dec 2, 2022Liked by Peter Nayland Kust

The steep part of the 2007-2009 decline was done by 2Q2009, but the trend was still down after that and the index didn't actually bottom out until the first half of 2012.

Housing prices tend to be sticky/laggy. When prices fall, many of potential sellers refuse to accept the new reality. As a result the period between 2009 and 2012 had lots of inventory that wasn't moving because it was still priced too high, and it didn't move until sellers capitulated. Personal anecdote: We bought our place in FL in 2011. Back in 2009, the seller had turned down an all-cash offer for 30% more than we ended up paying.

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Dec 2, 2022Liked by Peter Nayland Kust

Why do you think we had such a dramatic increase in house prices during the covid "pandemic" period from 4/20 through 6/22? Is some of the reduction now just a correction?

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The lockdowns and the requirement to work from home arguably did spur a revaluation of said home, and those who could arguably sought to purchase homes of a size and in a location more matching a lifestyle not oriented around going to an office 9-5 Monday-Friday.

At least some of the price increase from early 2020 on is thus an expression of an increased perception in the value of one's home. As such, this is not price inflation as monetarists would define the term, but a genuine rebalancing of the value of a home relative to other fixed and durable items one might purchase, and indeed towards one's overall pattern of consumption.

However, from late 2021 onward, businesses were starting to push back, and attempting to move the cultural needle back towards its prior position. How much success they have had or will have is as yet an open question, but it is fair to say that their influence is not nil, and so the continued rise in the index past last 2021 becomes more indicative of a speculative bubble than a genuine revaluation of the home within one's overall spending habits.

There is no magic formula to ascertain how much price rise is speculation and how much is substantive shift in perceived value. We can broadly say that there are elements of both in the price rise, and that only the degree to which the price rises are speculative will we see a deflating of the bubble.

Which means that, yes, the reduction is a correction--that is what a bubble bursting ultimately is, after all. How much correction there will be and how long it will take are questions we cannot answer from the data we have to date.

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