San Diego Real Estate or The Stock Market?

I recently was in a conversation about how great the returns in San Diego Real Estate have been since the “recovery” began and how they made the stock market look terrible.

Now this is difficult conversation to have – because it’s like comparing a cantaloupe to a kangaroo – you can eat both, but they have about nothing else in common.

Real estate is not a homogeneous asset – that is, there are many types of real estate: multi-family, single family, commercial, luxury, etc.  Price discovery is also very difficult in real estate, as no two properties are the same and the frequency at which they trade is very low.  Real Estate is most often purchased with leverage – which can magnify returns or losses, whereas the Stock Market is usually purchased on a cash basis.

The best metric that I could find to represent the San Diego Real Estate Market was the S&P/Case-Shiller Home Price Index for San Diego.

You can learn more about the Index construction and methodology here:

http://www.housingviews.com/

The best metric I think to measure the stock market was the  S&P 500, you can learn more about that index here:

S & P 500

Now before you read on – two questions?

During the past 25 years -which asset do you think has performed better and what are their respective returns? No cheating, write them down.  I could do a whole rant here on anchoring and behavioral finance but we can save that for another day.

Onto the data:

S&P/Case-Shiller Home Price Index for San Diego, numbers are the % change in price

1987	1988	1989	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
8.41	16.34	17.42	-0.06	-2.56	-4.18	-3.53	-1.12	-1.70	0.46	7.62	12.56	11.05

 

2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
15.69	9.32	19.08	17.64	24.21	5.56	-4.49	-15.28	-23.54	4.53	0.51	-5.01	9.53

S&P 500, total return, includes dividends:

	1988	1989	1990	1991	1992	1993	1994	1995	1996	1997	1998	1999
	16.61	31.69	-3.10	30.47	7.62	10.08	1.32	37.58	22.96	33.36	28.58	21.01

 

2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
-9.10	-11.89	-22.10	28.68	10.88	4.91	15.79	3.53	-38.49	26.46	15.06	2.11	16.00

 

The average return for Real Estate in San Diego was 4.56% with a 11.05% standard deviation.

In any one year, if this was a normal distribution (too lazy to check), 68% of the San Diego real estate return between -6.49% and 15.61%.

The average return for the S&P 500 was 11.2% with a 18.44% standard deviation.

In any one year, if this was a normal distribution (too lazy to check), 68% of the S&P 500 return would be between – 7.24% and 29.64%.

The correlation between the two data series was 0.28.

Looking at the data – the stock market won, however the leveraged return on real estate could change that outcome.

The key thing for me was the correlation coefficient – a number close to zero is good.  At 0.28, these two assets show little correlation between their return pathways.

The conversation shouldn’t be stocks or real estate, but rather stocks and real estate.

I wonder if there are any kangaroo and cantaloupe recipes out there…

Bye for now.

We hear a lot about the “aging” of the modern economies – it is true that most of the developed world economies are aging.  Whether it is better nutrition or healthcare, people are now living longer lives.

When Social Security first started paying benefits in 1940, there were 159.4 workers per retiree, in 2010 that same number stood at 2.9 workers per retiree.¹

As a society ages there are less people paying into the programs designed to support the older cohorts of the population. The older we get, more of the family budget tends to be spent on healthcare.  At the present time 5% of the population is responsible for 50% of the healthcare spending.  Healthcare spending is running about 18% of GDP – that means that a fraction of the population is consuming a huge amount of resources.  These two numbers were given to me by a speaker from AHIP.

In the past when the US had a younger population this imbalance was masked by the baby boomers – the proverbial pig in the python, as can be seen in the following picture.  The spending of the baby bombers propelled strong economic growth.

However now the baby boomers are aging(aged) and we no longer have the demographics in our favor.  We have gone from a pyramid to a tree.

We are not as bad as Japan –  an inverted wedge:

But we are certainly not Brazil:

Peak spending seems to occur in the age bracket of 35-50. As a society ages the rate of spending declines and economic growth starts to stagnate.  Government policies aside, as a society starts to age more resources are dedicated to the care of the age and personal spending declines. The housing requirements change, no more McMansions but single story residences devoted to the care of the aged.

Japan has an enormous population problem, the US has the beginnings of a population problem and Brazil has a strong tailwind.

The consequence of these population demographics changes may lead to rising health care costs, needs for a change in the type of homes being built and the stagnant economic growth.

What’s an investor to do – budget for rising health care costs.  Premiums for small businesses under the ACA, will be rising about 20% this year (slightly more than inflation… I don’t think TIPS will help with this). Investors will have to have an allocation to growth investments, if demographics play a role in global growth perhaps countries with solid populations will show the countries with the potential for growth, then the search for investments can begin.

That’s it from me and bye for now.

 

^{1                           http://www.ssa.gov/history/ratios.html}

^{2                           Charts are from http://www.census.gov/population/international/data/idb/informationGateway.php}

With the concern about inflation, TIPS (Treasury Inflation Protected Securities) seem to get a lot of attention. These are a bond where your return adjusts over time based upon the CPI rate.

At the moment they have a negative real return, i.e. if you account for inflation then these bonds have a negative rate of return… I am not sure if now is the time to be a buyer of TIPS.

Here is a chart of the real rates of return dating back to 1987.

People’s concern about inflation is often times driven by the ever increasing expansion of the monetary base.  However that does not always necessarily lead to inflation as measured by CPI, this is best evidenced by the ongoing drama in Japan.  Huge expansion of the monetary base and they pray for inflation, 23 years into their experiment:

The last concern about TIPS and inflation, that I have, is that since the Clinton administration, the way that CPI is calculated keeps getting adjusted because of the use of hedontics – but that is a conversation for another day.  Needless to say that is the CPI measure had not been adjusted over multiple time periods then we may be experiencing an inflation rate of 4-6%, not 2-3% as most people believe.  John Williams at www.shadowstats.com, has some amazing data on that.  Here is a chart from their site:

 

That’s it from me and bye for now.