Ira Artman’s Sterling Slivers: Erode Ahead


                 Wreck of The American Star
The remains of the SS American Star, ten years after its 1994 shipwreck.
Source: Wollex, Wikipedia - The Wreck of The American Star, 2004.

My prior piece, Dissembly Required, compared a) the $1.4 trillion spent on the bailout through month-end November, with b) the slightly smaller amount needed to raise family incomes to a level consistent with current home prices. 

It suggested that the current Administration should simply “Declare Victory and Leave.”

But what if this $1.4 trillion IS enough? 

Suppose that the bailout efforts-to-date WILL ensure that today’s home price correction simply follows the average historical correction of the past.  If so, what might the future really look like?

Torto Wheaton Research (TWR) is  an independent research firm owned by CB Richard Ellis, the world’s largest real estate services company.  Its research combines a rigorous academic foundation with sophisticated modeling techniques as well as “vast local knowledge.”   Their Senior Economist is Gleb Nechayev,  who has a Master of City Planning degree from MIT.  He is a member of the Urban Land Institute and American Real Estate and Urban Economics Association.

Nechayev provided an answer to my question in TWR’s The Real Housing Recovery Is Years Away.  He found that it takes about a decade for real home prices to reach their previous peaks:

  • Following the housing cycle of the late 1980s, real [i.e., inflation adjusted] prices declined by 8.1% percent from a ’89Q3 peak to a ’95Q1 trough, returning to the previous peak in ’99Q2 a decade later
  • Following the housing cycle of the late 1970s, the same real home price index showed a decline of 14.3% from its ’79Q1 peak to the ’82Q2 trough, only approaching (but still not quite reaching) its previous peak in 1989-also a decade later.
  • A composite index for 10 cities, … from S&P/Case-Shiller, show[ed] … an inflation-adjusted decline of 26% between the peak of August ’89 and trough of February ’97. It took over 7 years for home prices to reach the real bottom across those major cities, but it was another 4 years after that-in March 2001, which coincidentally marked the start of a recession-that real prices returned to their 1989 peak [about 11 years after the peak].

He concluded his prior-cycle-based forecast with the following words and graphs:

  • If home prices follow the timeline of previous cycles, one might expect a real recovery around 2016 at the earliest.
  • While a faster recovery is possible, it seems highly unlikely, considering how weak the current economic conditions are, compared to periods following previous housing bottoms.


Source: G. Nechayev, TWR - The Real Housing Recovery Is Years Away [See References].
Note: Horizontal axis of the top OFHEO graph is in Quarters, and horizontal axis of the bottom Case Shiller index graph is in Months.

If you hope that the “fallen star” of the American economy - residential real estate - will reclaim its real past glory in less than ten years, then you are effectively assuming that the erosion of the past will not be encountered on the road ahead.

PS: The photo at the beginning of this article captured what the American Star looked like 10 years after its 1994 wreck.  If you’re wondering what happened to the American Star since 2004, check out the pictures below, taken from 2005 - 2007.

         Wreck of The American Star, 2005 - 2007
Source: Fred Kuhne, Wikipedia - The Wreck of The American Star, 2005 – 2007.

- - - - - - - - - - - 
I used to work with numbers for a living, but now I hope that current bailout efforts put the economy on the right tack as I look for a job or at least my next idea.  Till next time.

REFERENCES [Accessed 2 Dec 2008]

I. Artman, Sterling Slivers - Dissembly Required, 1 Dec 2008.

G. Nechayev, Torto Wheaton About Real Estate - The Real Housing Recovery Is Years Away, 21 Nov 2008.

Laura Cantrell, Trains & Boats & Planes - The Wreck of the Edmund Fitzgerald, Rhapsody/Diesel Only Records, 2008.

One thought on “Ira Artman’s Sterling Slivers: Erode Ahead

  1. Ira,
    I’m actually commenting about the 100 years article. You might want to read Bill Gross’ latest commentary on the PIMCO website. He’s making a very similar point, shorter time frame, about mean reversion. His final comment is that Corporate bonds are the preferred asset; I do think some of his stuff (you can read the prior monthly comments on the site as well) is self serving at times. Also, I couldn’t find the DB article from the link. Goes to the DB home page and when I typed in the article title, I wasn’t able to get anything. Thanks.

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