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I'm not sure how far the ratio will keep increasing, but I don't think we're near the end of it yet.
If anything, desirable areas are often becoming more desirable, and worse areas less desirable. How big this delta gets is debatable, but I don't see the overall trend changing for the foreseeable future.
So what signs are you expecting to see which will preceed a turnaround?
It seems that the fad these days is the idea that real estate in better neighborhoods such as those with good schools, will appreciate by more each year, even in percentage terms.
But let's think about this for a moment. Let x1 = the price of a house in a mediocre neighborhood today, x2 = the price of the same in 10 years; y1 = the price of a house in a good neighborhood today; and y2 = the price of the same house in 10 years' time.
The 10-year compound (not annualized) appreciation, expressed as a fraction, for house "x" is (x2/x1) - 1. The figure for house "y" is (y2/y1) - 1.
If the idea in the first sentence of this post holds true over the next 10 years, then
(x2/x1)-1 > (y2/y1)-1
With some algebra, and the commonsense assumption that all prices are positive, this inequality implies that
(x2/y2) > (x1/y1)
In words, this means that
(Future ratio of home prices) > (present ratio of home prices).
This can be interpreted as a trend: The ratio of home prices between good/not-so-good areas goes up with time.
This is clearly un-sustainable, because the price ratio cannot keep going up without bound: Is it really plausible that in 50-100 years, homes in good neighborhoods in the same city will be (say) 40X the value compared to those in mediocre areas, even if the ratio today is (say) 2.5:1?
Think about what type of future economic inequality that would imply.
So the fad mentioned in the first sentence of this post seems to be essentially a high valuation of future neighborhood inequality, and by extension, income inequality.
AKA an inequality bubble.
What am I missing?
- one shouldn't use "price of the house"; one should use "price of the house adjusted for inflation"
- you seem to assume x2 and y2 will always be greater than x1 and y1, respectively; which it won't once adjusted for inflation because...
- ...how do you account for a changes in neighbourhood desirability and, therefore, (positive or negative) demand driven prices?
So what signs are you expecting to see which will preceed a turnaround?
For distressed areas:
1) Owner-occupied residence purchases. I think if you're going to see a real turnaround in an area, people have to be putting their money where their mouth is for the long term and have some skin in the game for the neighborhood's recovery. Even high priced renters can easily scoot off at the lease expiration.
2) An influx of middle class and above jobs, or at least easy commutability to areas where these jobs are. There are some up and coming urban neighborhoods here in Indy, and while they may not be job hubs in and of themselves, they are easy drives to where jobs are.
3) Local leadership, at the municipal or even neighborhood level, determined to turn the area around. This can't be overstated. If you have no leadership at all or bad leadership, the neighborhood is going nowhere.
4) Segueing off point 3, you need a reduction in crime and blight. Poor people are not criminals by default. It may be more tempting for a poor person to commit crimes because they don't have as much education or as many hopes, but if they think it through, most people won't commit crimes. Crime doesn't pay. There needs to be a widespread civic effort, from civic leadership to business leadership, to have opportunities and discourage crime.
- one shouldn't use "price of the house"; one should use "price of the house adjusted for inflation"
It does not matter.
(x2/x1)-1 > (y2/y1)-1 (relation 1) is true or not. If we adjust for inflation, we have (x2'/x1)-1 > (y2'/y1)-1 (relation 2) where x2' and y2' are inflation-adjusted versions of x2 and y2. Of course the adjustment must be consistent, so we demand that x2'/x2 = y2'/y2 (same inflation factor used for both).
With a little algebra, it can be shown that relation (2) is actually equivalent to relation (1). Put another way, the statement is the same regardless of whether we adjust for inflation or not.
Quote:
Originally Posted by LIGuy1202
- you seem to assume x2 and y2 will always be greater than x1 and y1, respectively; which it won't once adjusted for inflation because...
No, I do not make that assumption anywhere. I simply use algebra to get one inequality from the other with no additional assumptions other than what I stated earlier.
Quote:
Originally Posted by LIGuy1202
- ...how do you account for a changes in neighbourhood desirability and, therefore, (positive or negative) demand driven prices?
1) Owner-occupied residence purchases. I think if you're going to see a real turnaround in an area, people have to be putting their money where their mouth is for the long term and have some skin in the game for the neighborhood's recovery. Even high priced renters can easily scoot off at the lease expiration.
2) An influx of middle class and above jobs, or at least easy commutability to areas where these jobs are. There are some up and coming urban neighborhoods here in Indy, and while they may not be job hubs in and of themselves, they are easy drives to where jobs are.
3) Local leadership, at the municipal or even neighborhood level, determined to turn the area around. This can't be overstated. If you have no leadership at all or bad leadership, the neighborhood is going nowhere.
4) Segueing off point 3, you need a reduction in crime and blight. Poor people are not criminals by default. It may be more tempting for a poor person to commit crimes because they don't have as much education or as many hopes, but if they think it through, most people won't commit crimes. Crime doesn't pay. There needs to be a widespread civic effort, from civic leadership to business leadership, to have opportunities and discourage crime.
That's just a start but you get the drift.
And low-priced renters get displaced at the lease expiration.
Do you have a solution that does not involve class warfare?
Why should local leadership wage war on its poor renters?
(x2/x1)-1 > (y2/y1)-1 (relation 1) is true or not. If we adjust for inflation, we have (x2'/x1)-1 > (y2'/y1)-1 (relation 2) where x2' and y2' are inflation-adjusted versions of x2 and y2. Of course the adjustment must be consistent, so we demand that x2'/x2 = y2'/y2 (same inflation factor used for both).
With a little algebra, it can be shown that relation (2) is actually equivalent to relation (1). Put another way, the statement is the same regardless of whether we adjust for inflation or not.
No, I do not make that assumption anywhere. I simply use algebra to get one inequality from the other with no additional assumptions other than what I stated earlier.
These are already built in to the prices.
"It seems that the fad these days is the idea that real estate in better neighborhoods such as those with good schools, will appreciate by more each year, even in percentage terms.
But let's think about this for a moment. Let x1 = the price of a house in a mediocre neighborhood today, x2 = the price of the same in 10 years; y1 = the price of a house in a good neighborhood today; and y2 = the price of the same house in 10 years' time.
The 10-year compound (not annualized) appreciation, expressed as a fraction, for house "x" is (x2/x1) - 1. The figure for house "y" is (y2/y1) - 1.
If the idea in the first sentence of this post holds true over the next 10 years, then
(x2/x1)-1 > (y2/y1)-1
With some algebra, and the commonsense assumption that all prices are positive, this inequality implies that
(x2/y2) > (x1/y1)
In words, this means that
(Future ratio of home prices) > (present ratio of home prices)."
I've underlined the incorrect assumptions you say you didn't make...but did. Maybe you need a little more algebra.
"It seems that the fad these days is the idea that real estate in better neighborhoods such as those with good schools, will appreciate by more each year, even in percentage terms.
But let's think about this for a moment. Let x1 = the price of a house in a mediocre neighborhood today, x2 = the price of the same in 10 years; y1 = the price of a house in a good neighborhood today; and y2 = the price of the same house in 10 years' time.
The 10-year compound (not annualized) appreciation, expressed as a fraction, for house "x" is (x2/x1) - 1. The figure for house "y" is (y2/y1) - 1.
If the idea in the first sentence of this post holds true over the next 10 years, then
(x2/x1)-1 > (y2/y1)-1
With some algebra, and the commonsense assumption that all prices are positive, this inequality implies that
(x2/y2) > (x1/y1)
In words, this means that
(Future ratio of home prices) > (present ratio of home prices)."
I've underlined the incorrect assumptions you say you didn't make...but did. Maybe you need a little more algebra.
The second thing you underlined is not an assumption, it is the conclusion.
The first thing you underlined is an assumption, but the math works the same even if both houses lose value, so you may be technically correct, but the point is moot. If both houses gain value but house "y" gains more*, then the conclusion follows. But even if both houses lose value, as long as house "y" loses less value*, the same conclusion applies for the same reason. Also, if house "y" gains value but house "x" loses value, the same logic applies there as well.
So yes, technically the wording of my assumption did take it to be given that they went up. However, my argument is more general - it applies even if one or both go down in value. The only assumption I really need to make is that the percentage value change for house "y" is greater than "x", regardless of whether one or both of them is positive, zero, or negative.
The behavior in a bubble is very different than the behavior in normal markets. Normal markets operate with mostly valid information that drives a supply / demand equilibrium. In contrast, bubbles have excessive demand driven by incorrect information.
Algebra describes neither normal market nor bubbles.
The underlying forces that make a neighborhood desirable are not set in stone. As there are shifts in employment, demographics, fashion/style, and various land uses some neighborhoods end up less desirable while others will soar. Again, you do not use algebra to describe such things but complex multi-variate econometric models. And they models will, he their very nature, describe just the "central tendency" of each shift, not the edge cases...
The behavior in a bubble is very different than the behavior in normal markets. Normal markets operate with mostly valid information that drives a supply / demand equilibrium. In contrast, bubbles have excessive demand driven by incorrect information.
Algebra describes neither normal market nor bubbles.
Total, utter nonsense. Statistics is based on algebra, as are other analyses, and no, my math is not wrong.
And the idea that point estimates don't use the same math as statistics is also misguided, because point estimates are both a limiting case of narrow distributions and a zeroth order approximation to a distribution that may or may not be a good approximation in a given case.
My assumptions are up for discussion, but you aren't addressing that here.
Quote:
Originally Posted by chet everett
The underlying forces that make a neighborhood desirable are not set in stone. As there are shifts in employment, demographics, fashion/style, and various land uses some neighborhoods end up less desirable while others will soar.
Ok, now we're talking. As a general matter though, this should mean that the idea of buying in a good neighborhood for future value doesn't really have merit, right?
Quote:
Originally Posted by chet everett
Again, you do not use algebra to describe such things but complex multi-variate econometric models. And they models will, he their very nature, describe just the "central tendency" of each shift, not the edge cases...
Doesn't matter. It is true that you get a bad answer if you put in bad assumptions, but this doesn't make a valid argument into an invalid one.
To this I say - who cares... People will buy what they want where they want no matter how good or bad it is....
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Wrong assumptions and wrong math...
