Update: Boom and Bust Cycles Across Markets

Back in July I posted a comparison of the total percentage gain during the boom years to the total percentage drop from peak to date across a bunch of markets, to see if I could establish a clear relationship or correlation between the two. I wanted to give a quick update on this analysis.

As a reminder, I based the gain/loss percentages on Case-Shiller data for May and August; and for the purposes of this comparison, I used the following definitions:

  • “Boom” returns are the total appreciation between 09/2001 (based on the oft cited relationship between the Fed taking down short term lending rates and the housing boom) and the peak for each market.
  • “Bust” returns are the total decline from peak to the latest reported numbers.

Boom vs. Bust update August 2008

Couple of things I noticed in this updated version of the analysis:

  • Overall, the slope of the line got steeper – meaning that the ratio of “bust” to “boom” increased. Based on what we are seeing in the super-bubbly markets (SF, San Diego, Phx, LA, Miami) I would expect this phenomenon will continue.
  • The “fit” of the line also got better – meaning markets generally moved closer to the line
  • Of the markets identified as “outliers” in the earlier analysis (Seattle, Portland, New York, Detroit), all but Detroit moved in the direction expected.
  

15 comments:

  1. 1
    jon says:

    “The “fit” of the line also got better – meaning markets generally moved closer to the line”

    Seems to me most cities moved away from the old line. Denver, Dallas, and Boston were above the line and moved up, and all the cities at the bottom moved down, especially the ones that where already below the line.

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  2. 2
    vboring says:

    another implication of the improving “fit” is that means that all real estate follows the same trends.

    i.e. all real estate is national, not local

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  3. 3
    deejayoh says:

    Hard to read on the image w/r/t “fit”

    R^2 for May = 0.4725
    R^2 for August = 0.5489

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  4. 4
    patient says:

    Interresting graph though I would suggest to plot the biggest recorded decline from peak for each market otherwise it becomes a pretty weird representation. The aggregated appreciation and the max decline to date would present a more interresting correlation.

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  5. 5
    deejayoh says:

    Patient – If I understand your comment correctly – I think what you describe is precisely what is on the chart. Appreciation from 2001 to peak vs. decline from peak to today.

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  6. 6

    Great Chart, Tim!!

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  7. 7
    patient says:

    No not exactly. I would like to see max recorded decline, not decline from peak to today. Some markets has an uptick and that makes for a strange correlation and it will get real strange when more markets start turning upwards. What to me is interresting to see is the correclation between aggregated appreciation and max decline. For most markets that’s what it is but not for some which can tip the line to represent something undefined.

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  8. 8
    Timber says:

    Nice chart. It shows we are making the proper decline, but we are just behind the rest in terms of the amount of time we have been declining. Don’t worry though we will catch up.

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  9. 9
    vboring says:

    Maybe it’d be useful to label each decline from peak with the time since peak.

    Seattle hasn’t fallen the same amount as Portland, NY, or San Fran, but part of that is because they hit their peak prices more or less recently.

    Or it may be interesting to compare annualized rates at which prices are falling vs annualized price increases. This would correct for differences in timing.

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  10. 10
    The Tim says:

    Re: Captain Kirkland @ 6,

    I agree, this is a cool chart, but I should point out that it’s Deejayoh’s work, not mine (note the “Posted by deejayoh” bit under the headline).

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  11. 11

    THE DOWNWARD SEATTLE AREA PRICE TRENDS SHOULD ACCELERATE AT A HORRIFYING RATE

    Even Dr. Doom (Roubini) didn’t predict a 7000 type DOW until next year. Its already 7500 and 2008 has a month more of declines?

    When stocks collapse, I predict Seattle real estate will follow in a similar percent loss, with this credit crisis from over-growth and wage mitigation [let alone mass lay-offs].

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  12. 12
    Matthew says:

    People in the United States and even more so in the Seattle area have no idea how bad this is going to get before the deleveraging is finished.

    We are just beginning to see the effects on main street, but yet people are acting like this a temporary blip on the radar.

    Very hard economic times are coming to this region, its going to get worse than most people realize before we recover.

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  13. 13
    David Losh says:

    Funny chart, what’s it do?

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  14. 14
    Interloper says:

    I like this a lot, shows there’s a real linear relationship between boom and bust.

    What’s most interesting is the outliers — the exceptions that prove the rule:

    – the DETROIT market, which has become increasingly undesirable as a place to live
    – the NEW YORK market (where housing potential may plummet after the data period because of the financial crisis)
    – the SEATTLE/PORTLAND market, which was booming late and should bust late

    PS Of course the slope line will get steeper; since the time periods of the two axis are different, the slope will ntaturally increase as long prices decline. It doesn’t mean the rate of decline is increasing.

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  15. 15
    Mark L says:

    One simple math thing to keep in perspective – a 100% appreciation is negated by a 50% decline. A 50% appreciation is negated by a 33% decline, and so on.

    If you draw that line on the chart, only Detroit falls under it – i.e. Detroit is the only market with no net appreciation since 9/01.

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