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| Fortunes Are Not Made on Shaky Intelligence – Conclusion |
| Written by Jonathan Smoke | |
| 11.09.2007 | |
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Discuss this article on the forums. (0 posts) As I said in yesterday’s post, “The Fortune article looks for price falls in almost every one of the 54 markets studied. While I do see significant price risk in areas that saw great appreciation in the early part of this decade and in areas suffering economically (likely a result in changing and now more realistic view of future prices), the rest should be at worst static.”
How did I reach this conclusion? Take for example, Atlanta, my home MSA. According to the article’s analysis, Atlanta will see almost a 13% decline in home prices over the next 5 years. But the economics just don’t support that happening. Other than a glut in condos from recently finished and in-process projects in Buckhead and Downtown Atlanta, the level of construction is roughly in line now with household driven demand. The economy is strong as incomes and jobs are expected to grow, and thus income-producing and home-owning households will continue to grow and net migrate to the area.  The only thing wrong or less positive about Atlanta is its forecasted home price appreciation rate, which matches its anemic history and is a reflection of the limited constraints on development. So, how could ownership costs be out of whack here so much so that we’d need to see double-digit declines to offset the single-digit increases seen in the early part of this decade? They aren’t. I have other issues with this analysis. “History” is defined as 15 years. This implicitly buys into the notion that the first 10 years of this 15-year period reflected the real fundamental values of housing. It’s as plausible for me to claim that home prices were undervalued during those years—after all there was limited investment activity since that was the time frame that people sought vast fortunes in the stock market. Finally, I have a real problem with believing that cities are static. Cities are dynamic—some improve and some decline, reflecting the relative economies and the opportunities for mobile households. So arbitrarily making a ratio become mean reverting is questionable. Does MSFT have the same growth prospects now as it did in 1995? No. So if target stock multiples can change based on the prospects of a company and the nature of its business, why can’t a similar multiple change for cities? We’re looking at ways to put together a more meaningful analysis like those followed in the papers I cited above to see if there might be a price to fundamental value view to guide where home prices may go over the next several years. If you are a researcher interested in this topic, contact us to see if we can collaborate on the analysis. In the mean time, my advice to you is not to invest your fortune in shaky analysis couched as insightful intelligence. 
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