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Monday, September 26, 2005

Prices "In Line With Long-Term Trends"

CNN/Money provides a short interview with a professor who claims that his study shows that home prices in many of America's cities, including Seattle, are perfectly in line with history.

Are home values in America's biggest cities out of whack with the rest of the country?

Chris Mayer, a finance and economics professor who heads the Milstein Center for Real Estate at Columbia University's business school, tackled that question by looking at price changes in 129 cities since 1940.

He spoke with MONEY's Cybele Weisser about his study, "Superstar Cities," which concludes that despite the recent boom, prices in most big U.S. cities have remained in line with long-term trends.
To be a superstar city, you need two things: limited ability for new construction and big demand. Boston, L.A., New York, Seattle and San Francisco are all good examples.
It is certainly true that "long term trends" have many big cities home prices increasing faster than in rural areas, but I find it to be a bit of a stretch that the increases of the last 3-5 years are "in line with long-term trends." Take a look again at the graph I presented in this post. If you draw a straight line from about 1975's data point to 1988, then another from 1990 to 2001, the slopes of those lines pretty well match up. But if you do the same thing from 1988 to 1990, and again from 2001 to 2004, you can see that those are drastically steeper slopes. 1988-1990's insane spike led to nearly flat prices for almost five years in Seattle. Why should we believe that the similar run-up in the past four years won't lead to the same thing, or an even more dramatic price correction?

(Cybele Weisser, CNN/Money, 09.23.2005)

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