Roughly twelve years ago, my parents built a house in Arizona. The cost of building the house (3,500 sq. ft.) was approximately $250,000.00 (Remember, this was in 1994/1995) The same house is worth roughly $840,000 (in 2006) That is an increase of 236% in twelve years. That’s an average of 19.67% appreciation per year for 12 years in a row. I don’t believe such appreciation can sustain itself at this rate. It will be interesting to see whether or not we can achieve a “soft landing” in the housing markets, however, I don’t think we will. The reason for it is kind of simple: everyone is talking about whether we are going to have a soft landing. If you have to ask about it, it’s probably not happening.
I find this comical because I was right. In retrospect, the value of the house is now $556,000 …roughly 33% less than what it was worth at the peak. It still seems overvalued in my opinion. Almost 4 years after the peak of the housing bubble we find ourselves in an interesting point in time. The bankers have obviously failed at the whole “soft landing” thing, and I think we may be in for a second dip into the recessionary bucket.
Let’s do a real quick technical analysis of the home price just for fun:
Technical Analysis of Home Prices
In this chart you can clearly see the long term support that exists around the $430,000 price range. From 2004 to 2006 the price of this house went on an insane ride up to $844,000
I distinctly remember telling my parents to sell when the house was up around $800,000 and they ignored me…which leads me to the past 3 years. Prices have been dropping steadily and we’re almost back to pre-bubble levels. At this point in time, I would guess that as soon as the price of the house reaches the support line at $430,000 it will be safe to say that the “bubble” cycle is over.
Let’s see how long it takes for this to pan out. Judging by the median slope of the graph, I would have to say that we are in for a treat around 2011-2012.
{ 2 comments }
How are you getting your pricing information on the house? It seems to me that your analysis would be full of so many assumptions that it’s not going to give you too much insight into reality.
I got the chart from zillow.com and it is specific to my parent’s house. Also, you’re right, there are a lot of assumptions. However, from a purely technical standpoint one must always make assumptions. The reality of the housing situation, in my opinion, is that prices aren’t going up any time soon. Perhaps things are different where you happen to live.