| /dev/null

Never saw the condo index before…thanks…seems to me that the chart above would look even worse if they could reflect condo mania as well. The house and condo markets must have some relationship…people often sell a house to buy a condo or vice versa.

Still the same stuff, prices bubbled.

I think we’re going to get another round of “hoocoodanode?”, which is pretty much been the catchphrase of this decade..

I agree with you, that this is not a valid trend. What arguably has happened is that, as the sheer quantity of housing stock grew with the population, the “tail” of the distribution has gone further out and gotten fatter – the same sort of phenomenon seen in similar situations, most notably biological (Stephen Jay Gould had some interesting columns about this).

Despite this increase of the tail, however, the distribution of the housing stock for many years conformed fairly closely with the income curve, because the banks had standards for their loans based on debt-to-income ratios and so forth. One result of this is that the house builders kept turning out the smaller “starter” homes, even though they had a larger margin for more elaborate construction – but there weren’t enough buyers for such houses.

Then the banks went crazy in the late 90s. Personally, I blame the securitization process; it meant that the bank could sell the loan, getting it off its own books and recording an immediate profit. There was no incentive at all to ensure the loan would, or could, be paid back, and loaning $700,000 to someone with a yearly income of $28,000 was perfectly reasonable – it generated larger immediate fees, with no long-term downside. That change in lending standards removed the debt/income ceiling on the loans, and everything else followed. In particular, the builders started producing the higher-priced, higher-margin properties, since more people could “afford” them.

Now, of course, the banks have (re)discovered the ancient principles of lending, and their (re)introduction has yanked the rug out from under house prices. I expect they will fall to historic multiples of median income (hopefully with minimal overshoot), and – as the chart shows – hover there for a decade or two, until the current lessons are forgotten.

Be careful of the scale on the bottom. The rise did start in 1997 but it is easier to see in the above graph since the data points are closer together. Most Case/Shiller charts you see show the data back to 1987. Since the data points are further apart it makes the slopes smaller.

@gregh

Again, it is repeat sales. So if a bunch of million dollar 5,000 sq ft homes came on the market new, and they all sold 2 years later for 1.1 million. The index would just show a 10% improvement for those homes. The size and quality doesn’t matter to the index.

But even if it did the theory still breaks down on how people can afford them as they do get bigger and better. Everyone wants bigger and better but only a few can afford it. Except during the boom where anyone could afford anything as long as they were willing to leverage themselves to do it. Desire has to be backed up by purchasing power to be considered demand. Demand was increased during the boom (not just for houses, but for anything, cars, luxury goods, college) because anyone that wanted purchasing power, regardless of income, could have it. That is in the process of being taken away and we are coming back to being able to prove you can afford something in order to get the money for it.

There’s a similar discussion underway over at Calculated Risk. They were speculating whether the McMansions have a future as multi-family dwellings. Several people have brought up the analogous situation with the large Victorians built in the 1800s, and converted after the various Panics and the Great Depression. There seems to be a consensus that the modern floorplans and construction are not amenable to subdividing the houses.

Every decade since 1890 has seen larger and more elaborate homes, so the above fact ’should’ lend to an overall uptrend across all decades, yet we see the mean reversion. Could sheer volume of homes created skew this? (what if an extreme quantity of homes were added to the market and they all were on the extreme edge in size/elaborate) We’re comparing same home sales, but the new monsters could drive up sales for existing homes?