Friday, January 04, 2008

Glassman: "Real estate excesses will vanish by spring 2008"

by Calculated Risk on 1/04/2008 02:21:00 PM

A few days ago, the WSJ asked: Will Home Prices Hit Bottom by June?. The WSJ's Greg Ip provided a link to a research report by James Glassman, economist at J.P. Morgan Chase. (no relation to James K. Glassman, co-author of “Dow 36,000″)

"The correction of housing prices is well under way. Given the present trends in income and house prices, real estate excesses of the past five years will have vanished by spring 2008.
And Glassman references this figure:

Glassman: House Prices to Income Click on graph for larger image.

This graph is incorrect. The author is comparing gross income per household vs. the S&P / Case-Shiller house price index.

The repeat sales index determines the average change in a house price. The gross income could be distorted by a few individuals with extraordinary income gains.

The average change in a house price could be distorted too, if the most expensive homes appreciated at a much faster rate than other homes. But this doesn't appear to be an issue.

Instead of using the gross income per household, the author should use the median household income gain for homeowners (probably the top 2/3 of households).

This is a simple error, but it leads to a very wrong conclusion. The real estate excesses will not vanish by spring 2008.

Besides the graph is very funny - the housing bubble of the late '80s is graphed as the normal price range. And the subsequent housing bust is graphed as housing being undervalued. That was a very painful bust for many builders and homeowners, and that bubble / bust was small compared to the current bubble.