Monday, November 19, 2007

Regression To The Mean

Reversion to the mean, also called regression to the mean, is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far.
In plain English it means if an asset appreciates by 6% a year for 100 years and all of a sudden appreciates by 20% a year for 5 years, it must depreciate in order to revert to the mean of 6%. That is what happened to housing. Historically over the 20th century housing prices have appreciated an an annualized 6%. So a house bought for $100,000 in 2000 should - by historical measure - be worth $179,000 in 2010 at 6% a year. But during 2001-2006 the house went from $106,000 to $250,000. So to regress to the mean, the house will have to depreciate back down to $179,000 over 4 years or a loss of 28.4%.

The so-called experts scoff at the notion of a 29% drop in house values. Impossible they mockingly sneer. Unprecedented they howl. Sure it is unprecedented. But so is a housing Ponzi scheme like we saw 2002-2006. So if the kind of lending we saw 2002-2006. The crash is happening. It will get worse before it gets better. Every prediction the so-called experts have made has been wrong. Lower interest rates haven't done anything. Foreclosures are setting new records every day. And the ARM resets are in full bloom.

By the time this is all said and done, some people will wish for a 29% drop in their house value. Reality of 35%, 40% and even 50%, while not the norm will certainly happen. As a renter with nothing but time on my hands and cash in the bank all I can say is bring that shit on!!

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