Why Is My Market So Expensive?: Part 1

[Juan Diaz]

Hi all, a long time ago when I was first getting into the housing business, I was really curious about what really drove the housing market. The maxim of investing seemed to be that housing prices would always rise, and you were dealing with a product that was necessary to live as a human being, so you were in a pretty stable environment. But all markets aren’t created the same. Even between two markets with thriving economies, you can have drastic price differences. So I went on a mission to search out the drivers of this price difference, and am publishing my findings from then in a series of posts.

This post will be dedicated to destroying some of the common misconceptions about the housing market. To begin with, the maxim is that housing costs in the long run will only increase. This is true to some degree, but only inasmuch as you examine nominal prices and ignore inflation. The real price of housing, at least in the American market, was actually fairly constant throughout the period from 1970 through 2000. In fact, if you go even further out, the United States has stayed near the same approximate level for about 110 years, from 1890 to 2000.

But if you look at that graph above of average national house prices (from Case-Shiller HPI), there’s a very obvious troubling matter. Why in the world has the average price of housing the USA risen so drastically over the past 15 years? If you’re familiar with the world of commodity investing, such a steep rise is a troubling long-term signal. If we have a 100 year history of commodity prices hovering within a certain level and a current price 70% above the historic baseline, it means that the market for this commodity is not rational in any way, shape or form.

So great, we’re all housing investors and I just said the ceiling was going to collapse on the housing market at some point in time. Go ahead, tar and feather me, right? Well, I’ve got fantastic news for you: in the same way that Goldman Sachs profited hand-over-fist from overpriced housing, you’ve got the opportunity to do the same in the years ahead. How so? By understanding the how’s and why’s behind this irrational market in housing and knowing to get out when they change.

Check back tomorrow for part 2 of the series: demographics & location!