Tracking Asset Classes
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
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
Comments
I haven't the foggiest clue. Though indeed, and I'll admit that these issues are probably related, I also don't see how that is responsive the questions I asked. But thanks.
Set the index year to 2000 instead of 1995 using the same data that you have on page 20 of the ppt. You'll see the housing bubble then. Its interesting the tricks you can play with charts by changing the base year. Not saying the CME is trying to be tricky here, but housing has clearly outperformed all other asset classes since 2000 - and in doing so, has racked up gains that are 3-4x the historical norm.
I've often heard that housing and the stock market tend to run in opposite cycles - so it is interesting that over this period they are both up. Not so unbelievable that REITs track housing.
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.''
Subprime Won't Be `Anchor' to Economy, Buffett Says
..
Are you saying you don't see a increase and subsequent decrease, like we see with the stock market bubble? If that's what you are saying, then of course not. Prices haven't fallen significantly yet. That's why people say you can't definitively recognize a bubble except in hindsight. Take a look at graph in 5 years, and it will be obvious. Or at least that's my opinion.
Or are you saying that housing gains haven't been that remarkable compared to stocks and bonds, and therefore it doesn't look like a bubble has been inflating?
If that's what you are saying, than you don't understand the basic difference between stocks and bonds and a house.
When you invest in stocks and bonds, you are giving a company money to produce a good or service which will (hopefully) create a return on your investment.
Make a widget for a dollar. Sell it for 2 dollars. Company increases earnings. Stock or Bond price goes up and/or dividends go up.
When you buy a house, you aren't investing in anything, except potentially cash-flow from rents. What you can charge for rents is severely constrained by the incomes of the people you are renting to. That's why folks always say the housing prices in a rational market should be highly correlated with rents which in turn is highly correlated with income.
You aren't producing anything. There is no value-added that the money you spent on a house can return to you in terms of investment returns. It's not really an investment an all. It's simply a depreciating asset which takes a lot of money to upkeep, that people live in.
If you looked at housing prices historically you would see this. Adjusting for inflation, the cost of a house didn't increase at all from the turn of the century until 1995. Not at all. There was no "investment" return from your depreciating asset, just more and more costs associated with upkeep.
We have been in a mania for the last 10 years, so that is why you've seen the housing appreciation you are seeing in the graph. Mania's end eventually and they always end badly. The housing mania is currently ending.