Tracking Asset Classes

[bobfandango]

Apologies if this has been covered previously, but I cannot find any related threads.

Please consider the following:

From 1995 to 2005:
Return Volatility
Housing 8.00% 1.44%
Bonds 7.74% 2.25%
Stocks 8.66% 7.13%
REITs 6.61% 6.99%

Source: http://www.cme.com/files/CmeCsiHousing.pdf

Please also see the graph on page 20 of the same document.


It seems odd to me that over that ten year period that such a diverse set of asset classes could perform so similarly. Then, looking at the graph on page 20, although the stock bubble is quite clearly visible, I don't really see anything that looks like a housing bubble. Moreover, it actually appears that all these assett classes are, at least since about 2002, trending along the same trendline.

To be clear, I am no RE shill and I'm not saying there is no real estate bubble. But I am puzzled by this data and wonder if anyone hear can help me make sense of why the housing bubble is not apparent from these numbers and why such diverse assets seem to be tracking one another...

Thanks

[george]

Cool graph. What does you suppose that asset class comparison looks like going all the way back to 1903?

[bobfandango]

[deejayoh]

[TJ_98370]

DJO, bobfandango

Interesting point on the referenced graph on how the (beginnings of a) housing bubble becomes apparent by changing the index to year 2000. I don't have the skills to manipulate the data on an actual image, but I can envision what you are saying DJO. Since this article is about housing futures and options pitched at "...real estate owners who wish to hedge risk that the housing bubble may burst sending real estate values lower..." amongst others, it implies that the housing value data as presented on the graph is meant to suggest that a bubble does exist (?).

(For what it's worth, using the existing scaling on the graph on page 20; average annual appreciation for housing from 2000 to 2005 appears to be about 13%, from 2003 to 2005 average annual appreciation for housing was about 20%, average annual appreciation of the S&P 500 for 2000 to 2005 was approx negative 8%, both bonds and REIT had an average annual appreciation of about 10% from 2000 to 2005)

Also, it is not clear (maybe just to me) what house value data is being used in the graph. Is it based on national data or some locality? My point being the increase in house prices in places like L.A., Washington D.C., and San Diego have been more severe than what they have been in other places like Chicago. If the housing value data on the graph were based on Chicago sales statistics, the uptick in values wouldn't be as obvious as if they were based on San Diego sales statistics.

Finally, since the referenced article is about housing futures and options, it is interesting to note what the Oracle from Omaha has to say about derivatives:

Housing, Derivatives

Buffett said Berkshire units related to home construction have been hurt by a housing slump in the U.S. economy he expects to continue for ``quite a while.'' He also used the meeting's question-and-answer platform to warn about the dangers of financial derivatives, legalized gambling, and overpaid corporate executives.
The Federal Reserve's efforts to regulate the use of credit to purchase securities have been made irrelevant by derivatives, he said. The instruments are derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. (or real estate prices - my comment)

``The introduction of derivatives just made any regulation of leverage a joke. It's an anachronism,'' he said. Because of them, ``there will be some very unpleasant things that happen'' in the financial markets. ``We may not know exactly where exactly the danger begins and at what point it becomes a super danger.''


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[biliruben]