Friday, February 20, 2009

Help Jake Understand: Home Prices in Terms of Equity

The last time I posted a "Help Jake" I got a TON of great replies (I'll admit that topic had more of a global economic appeal), but lets see what you all have to say?

First, what is it? It's the median home price in terms of the number of S&P 500 shares required to buy it, going back to 1968...

Explain away...

Source: S&P / NY Times


  1. This is way too complex to explain, but here's your simplest answer: Population factor.

    The S&P 500 is limited to 500 companies but housing prices don't skyrocket with increases in population, more housing inventory is created first, which means the price rises more steadily than the S&P which, with the boom in securitizations since 1980 has allowed equity mutual funds, pension funds and 401(k)'s to invest in equities (and MOST of those index funds invest in the S&P500). The S&P therefore is much more scalable than housing.

  2. Explanation: home prices are a better inflation hedge than equities.

    Corollary: the Fed controls nominal home prices, but it does not control real earnings growth.

    Implication: print all you want; it won't really help the stock market, but it will eventually -- after you have Fannie and Freddie swap all ARM's for fixed rate loans -- help home prices.

  3. S&P is much more volatile than housing. Thus the relationship is primarily driven by macro trends in equities.

    Hence you have relatively high cost in 70s and 80s and relatively low cost since.

  4. sprizouse- then why the relative outperformance of housing in the 19770's and 2000's?

    additionally, why with the housing bubble popping, are homes still outperforming equities?

  5. Looks like a baby-boomer preference for houses in their younger years and a preference for equities in their mid-life years.

  6. again though, then why the re-emergence of housing? even during the popping of the bubble?

    my initial thought (just a though, so please keep the comments coming) is it is a reflection of leverage. during the 1980's leverage in corportations (equities are just levered portions of a companies total value) was rewarded as financing became cheaper (interest rates dropped dramatically), but individuals didn't think of homes as investments yet (i.e. they just lived there and didn't use home equity to buy another home / buy a new car).

    since 2000 homes became the leverage vehicle of choice due to no money down deals and the like.

    now, leverage is coming crashing down, but it turns out equities (and consumption by individuals) was a levered vehicle based on the value of homes themselves, which individuals used as an ATM to support consumption, which supported equities. The reason equities haven't rallied is since 2000 they didn't invest in themselves, they just paid back owners via dividend or stock buyback.

    no ATM = no consumption = a fall in equities more than housing, which at least can still provide shelter

  7. I'd like to see the case-shiller index laid over this.

  8. It's not a reemergence of housing, but a death of equities, which can only get worse as the baby boomers age. A cohort reaching retirement age in bubble-level numbers is going to flee equities with a passion.

    This started a little earlier than it was supposed to because of the collapse of the housing bubble, but the trend is written in the demographics.

  9. Jake - compare the following coorelations:

    1. Equity value and number of S&P shares to buy a home

    2. Leverage (however you want to define it) and number of S&P shares to buy a home

    I suspect #1 will have much higher correlation...

  10. all good ideas... look out for requests to post this monday

  11. Take an idealized version of the baby boom: a pimple curve with a baseline of 1, a start point of 1945 and an end point 20 years later at 1965. Slide this curve forward by about 30 years: an age where the first boomers really need houses. That puts the start of the pimple at 1965, ending at 1985. Slide another version of the curve forward by 45 years: an age when the boomers have real money to invest in the market. That puts the start of the pimple at 1990, ending at 2010. Let the two curves represent demand: the first for houses, the second for equities.

    The curve shown in the post is basically a ratio of house price to share price. If price reflects demand, divide our two curves above into each other and plot using a log y axis with the 1 baseline lined up with the 40-year-average home price. What do you get?

  12. Oops: typed 30 years for the first slide instead of 20. Pick whatever numbers seem reasonable.

  13. I can explain it several ways since there are many missing variables, like inflation. The least risky explanation is to say you are looking at a chart that shows the changing preference in peoples' desire to hold home equity versus hold stocks.

    Accepting it at face value, stocks are overvalued by about 30% relative to homes or homes are undervalued by 30% relative to stocks. The move may be as much as 60% if the ratio reaches 1970 highs.

    Persistently high inflation (but not hyperinflation, a special case to itself) would be one way to correct the imbalance.

  14. Represents the decline or devolution of US industrial, and manafacturing might.

    The make up of the "500" to include value by turnover stocks like Walmart.

    It is an interesting and yet surprising realtionship.