Shiller Perspective on Housing

Here’s an index of existing housing prices going back to 1890 which is pegged at $100k (adjusted for inflation). This chart was developed by Robert J. Shiller – a Yale Economist. If the great depression is any indication what we might be facing as a country, then this chart says is all. Reading it like any other chart, via technical analysis, it looks like median home prices still must drop another $40k or so just to get us back to where we were before the boom. Some will say we still need to drop even further – a la Great Depression levels. If that is the case, we are still looking at home prices being slashed another 50%.

My Opinion you ask…?

I’m so glad you asked. While it doesn’t seem impossible for us to go back to pre-2000 housing prices, I also believe in the laws of supply and demand, and when the buyers perceive/believe existing housing prices are cheap, then they will start buying up existing inventory. While we haven’t seen this yet as a country as a whole (further indication that housing may still continue to drop), we may start seeing pockets of real estate strength in certain areas of our country. The best way to use this chart is to look at what the potential may be, and where we may possibly end up with our home values. Going forward – if housing prices go back to $110 then the toll it will take on the markets will be devastating and it may well indeed take us years before we start to recover.

In regards to the stock market today – the S&P, Dow, Russell, and NASDAQ are all extremely oversold. As a result, we are prime for a bounce. We are also bouncing off of lower the trend line that should be conducive to a potential rally. However, heading in to the Monday open, futures are selling off, and if the S&P cannot hold its November lows, we could see another nasty leg down in this market. At this point we are hesitant to put any new short positions on the table, due to the extent of the short-term oversold nature of the markets and hesitant to add any new long positions due to the inability of the markets to add to the rally we saw last Tuesday.