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Ridiculous Prediction of the Week:

Washington Post: "George Mason University's Stephen Fuller called up a PowerPoint slide predicting that in 2057, the average annual household income for the region will be $1,307,000.

Whoo hoo! That sounded great. Then he pointed out that in 50 years, the average Washington area house will cost a whopping $14,061,000."

Putting aside the absurdity of trying to predict wages and housing prices fifty years out, I'd love to see the assumptions that allow housing prices to be eleven times average household earnings. Are long term interest rates expected to decline to 2%?

I'd have thought Fuller would have gotten out of the prediction business given that he was quoted in Fall 2005 with regard to the D.C. area housing market as follows: "In a nutshell, you couldn't be in a better market. If you're worried about some bubble, or slow down, or something that's evil, just put yourself in any other market."

c.f.w. (mail):
Neither figure seems out of he ballpark to me. Why is it absurd to look forward 50 years for finance questions? We do for social security and the like. Long term interest at 2% does not seem outlandish given what has been done in Japan, and where we were in 1981 (money market mutual fund rates - for government obligations - over 10%). I would also consider the Washington market pretty recession proof, given all the government money sloshing around.

Why throw up your hands rather than come up with what you think will happen (range with assumptions)? I thought business lawyers were supposed to be smart, multi-talented, worth $10 per minute, able to find good experts, etc. Are you saying questions this interesting need to be punted to the Wharton/McKensey/hedge fund crowd?
6.1.2007 2:40pm
Bret (mail):
Current price/income ratios in California:

Los Angeles 10.4
San Diego 8.9
Santa Ana 8.8
Oakland 8.7
San Francisco 8.0
San Jose 7.8
Riverside 7.1

Is 11.0 really that outlandish?
6.1.2007 2:48pm
DavidBernstein (mail):
I have no idea whether interest rates in 2057 will be 2%, -2%, or 20%, and neither does Fuller, or the Wharton etc folks, either. I also have no idea what government spending will look like in 2057. I do know that housing prices at 11 times average salary would be well outside the norm for American history. Even in the most expensive areas of the country today, the ratio doesn't approach that level.
6.1.2007 2:49pm
DavidBernstein (mail):
Whoops, according to Bret, it does approach that in L.A., but only after the greatest short-term increase in housing prices in American history, in the most expensive city in the country.
6.1.2007 2:50pm
MikeChittenden (mail):
According to this article from The Washington Post, in November 2005, the typical household income was almost $45,000 in DC and the median home price—$450,000. That doesn't make 11 times seem that far out of possibility.
6.1.2007 2:53pm
John Burgess (mail) (www):
Economist has a review of a book exactly on the topic of the perils of prediction. Definitely worth looking at.
6.1.2007 2:54pm
Bret (mail):
Just so we're clear, I pulled those numbers off a website (Source) They may or may not be accurate. In fact, I think he gets his median home price info from MLS data, which probably puts that number on the high side as it represents median *asking* price.
6.1.2007 3:00pm
Anon1ms (mail):
A nique example, I'll admit, but the ratio for Key West was over 15 in 2005 -- median value of housing was $752,900 with a median household income of $49,900.
6.1.2007 3:33pm
DavidBernstein (mail):
I'll bet the income ratio of recent purchasers in Key West was nowhere near 15-1.
6.1.2007 3:36pm
Anon1ms (mail):
"I'll bet the income ratio of recent purchasers in Key West was nowhere near 15-1."

Probably not, but then that's a different issue. I'm not sure the 50-year projection for the DC area was claiming that new purchases would be at a income ratio of 11-1.

Just for fun, here's a more extreme ratio: Palm Beach, FL, almost 20-1.
6.1.2007 4:02pm
SenatorX (mail):
Oh has he predicted another credit bubble to peak that year? It would be nice if by then something about manageble debt levels would have been learned. I find his faith in the continued ignorance of inflation to be disturbing.
6.1.2007 4:28pm
Justin (mail):
"the most expensive city in the country."

Really?
6.1.2007 4:30pm
Justin (mail):
"the most expensive city in the country."

Really?
6.1.2007 4:30pm
frankcross (mail):
Well, I wonder about that projection too, but I don't think the ratio is off. I suspect that as people grow richer they would devote a higher percentage of their income to housing. You wouldn't need to purchase a proportionately greater amount of housing or gasoline, for example. I would guess, and it's only a guess, that consumption would shift, relatively, to housing.
6.1.2007 4:45pm
Crunchy Frog:
Justin: Given the long commute that Angelenos take for granted, and gas prices north of $3.50, yes, really.
6.1.2007 5:22pm
DeezRightWingNutz:
I bet that that the ratio of home price/income for homeowners isn't 11:1. I bet the median homeowner's average (or median) income is much more than 9% of the price of the home.
6.1.2007 6:17pm
Nostradamus (mail):
Prediction of the Week: There will not be weekly postings each week entitled "Ridiculous Prediction of the Week".

The above is also my silly observation of the minute, my most likely to be true hypothesis of the hour, my most pot browniesque comment of the day (or does a "comment of the day" require support by a second blogger?), the most off-topic response of the business quarter, and my most sarcastic point on the most Xiest of term Y I to be made on an odd numbered non-leap year between 2003 and 2008.
6.1.2007 6:18pm
DeezRightWingNutz:
Or, to clarify, there are a lot of people that live in apartment complexes near my subdivision that make 15% of the price of my house. I bet the people in my subdivision make 30%+ of the price of their houses.
6.1.2007 6:19pm
RMCACE (mail):
Interest Rates do not have to fall to 3% for this to plausible. The standard mortgage could instead shift from being a 30 year term to a 50 year term.
6.1.2007 8:22pm
midlantan (mail):
Granted, these predictions may be totally off the mark in absolute terms (and Fuller's track record doesn't appear to be the greatest). He seems to be assuming an average 6% growth in income, and a little over 7% average growth in housing prices. Those seem optimistic. But the 11x *ratio* doesn't seem farfetched at all. As others have pointed out, that's about what many areas have now. (Whether that's sustainable in the long term in DC, or SF, or LA, is of course an open question.)

A significant fraction of "households" don't own their own houses. Overall, I think it's about a third, and in places like metro DC, that fraction tends to be higher. Even though lots of high-earners rent, homeowners tend to have higher incomes than renters. So a median home price of 10 (or 15) times the median income for an area isn't ridiculous to imagine. The median income-earner isn't usually the one buying the median-priced house -- it's usually someone making more, meaning that in a typical purchase, the ratio of income to price is much lower. Of course, a ratio of 11x probably means either interest rates or the percentage of homeowners would be at or below its current level (and even then, such high ratios may not be sustainable in the long term).

DC doesn't have such a high ratio now. Median household income in metro DC is something like 74K (well above the US average), and the median metro DC home price is about 425K, according to realtor.org. So the ratio for DC is a little less than 6. However, in the SF Bay area, median HH income is about 68K, while median home price is about $750K. That's about 11x -- in other word, what Fuller predicts DC will look like in 50 years. I wonder if he also thinks we'll have nice weather, earthquakes, and proximity to the beach, too?
6.1.2007 9:58pm
triticale (mail) (www):
Just on a guess, the Key West home market may well have higher than average down payments, with people selling homes elsewhere to move there.
6.1.2007 9:58pm
theobromophile (www):
The current median for Washington, DC houses is $422,500; the median income is $46,000/year. Therefore, there is a 9:1 ratio now. (Note that the median income for areas just outside of Washington is higher: Loudon County is at $98,000/year.)

If I can do my math right, he's predicting that houses will rise in price 10% per year for the next 50 years, and income will follow the same path. If he is considering the income of wealthier counties (which makes more sense), that would rise about 6% annually for the next 50 years to make his numbers work.

Neither one seems feasible; the historic inflation rate is somewhere around 4%, which would have salaries rising six fold through the next fifty years.
6.1.2007 10:17pm
who'syourdaddy:
When measuring median home price, I assume they're measuring the price of homes that sold over a given period, right? How sure can one be that the homes that sold are a good representation for all home prices in an area? Do lower-priced starter homes turn over more often?
6.2.2007 9:31am
midlantan (mail):
theobromophile -- You're right that the ratio for the actual District is currently about 9, but Fuller was predicting income/prices for the larger metro area, not just DC proper. The household incomes in the metro area average a lot higher than in DC - which, like many big cities, has a lot of very high incomes, but even more low incomes compared to it many of its suburbs. But since it is a metro area we're talking about, it makes sense to consider "suburban" data as well. (DC is also like SF, in that it's a relatively small core city for its metro area, so it's even more fitting to consider its "suburbs" too. DC's pop is under 600K; SF's is just over 700K, but both nominally anchor metro areas of 5 million+.)

I'm not sure how you calculated, but even if the DC-only median income (46K) were to rise to 1.3mil in 50 years, it would be a growth rate of just under 7% per year (not 10%). To get from metro median of 74K to Fuller's 1.3mil prediction would take a growth rate of 6% or so. Both are quite optimistic, I think, but not quite as outlandish as predicting 10%. (And as I said before, it's unclear to me whether the current or predicted ratios for certain metro areas -- whether 6x income, or 9x, or 11x -- are sustainable in the long term is an open question. I would think home ownership rates would have to go down, eventually. Or perhaps the current ownership rate could be sustainable with super-low interest rates (which would have other ramifications that could be unsustainable). Or perhaps an income/price ration of around 10x could be sustained with current ownership and interest rate levels if there were a lot less mobility -- i.e., most people staying in their houses for years, and a smaller group of mostly-high-income people vying for a comparatively few houses being sold. That doesn't sound like a *good* situation, but it might be one way to arrive at the numbers Fuller predicts. (And of course, what Fuller's *not* telling us is that by 2057, DC metro contains a mere 18000 people, the capital has moved to Fargo, and everyone in the heartland is making $10 million a year and paying $1 million for each of their many houses, to which they teleport or jetpack on weekends.)

who'syourdaddy -- A limited sampling timeframe definitely could skew median price figures, but the metro area is a fairly big place with lots of sales, which would seem to make that less likely. And the realtor stats for the DC area are pretty consistent. The 422K figure is for Q1 of 2007, but the median for all of 2006 is about the same. Starter homes may also change hands more often. They probably do, which might skew the median down slightly, but by how much, I have no idea.
6.2.2007 12:47pm
c.f.w. (mail):
Major changes in the tax law - remove the interest deduction - might change the result how? I predict the deduction goes away and that makes ownership versus renting a tax neutral decision.

Reductions in costs of building materials or average home size change things how? It seems to me we will have little problem hitting 6% growth in income, from increased productivity (assuming no major nuclear attack on DC).

I also predict massive increase in the efficiency of construction - with computer aided design and new lighter and cheaper materials. Look at the Gehry work in LA - that would not have been possible (practical) say 20 years ago (before computer aided design).

Look at the 200 story residential structures going up (or planned) in Asia (Dubai, Kuwait, etc.). Those are using composites in place of steel for framing. With nanotech and carbon based super strong and light compounds, we could see spectacular works (with small private spaces - say 1300 square feet average for a family of 4).

The 200 story structures that take 25 years to build are the new cathedrals. I predict they will be perfected in the US, EU, Australia and Asia to include office space, shops, gyms, sports areas, etc.

Tall structures are quite efficient if the residents can move around (as in NYC and London) with public transport, fussganger (pedestrian) malls in center cities, and bike lanes - likely to be much improved over 50 years.

Cars will be rarer, mostly electric, and smaller. Nuclear power plants will produce 75% of US power, including power for ground transport.
6.3.2007 11:13am
jallgor (mail):
I have never heard anyone say that LA is the most expensive city in the country. All the cost of living articles I have ever read usually put New York first and then San Francisco. Anecdotally, everyone I know who has lived in both LA and New York (and this includes myself) found LA to be much less expensive than New York.
6.4.2007 1:14pm