Here follows an exchange via e-mail with Tom Davidoff regarding his recent talk:
“Glad to hear it went over well. I don’t think AV is available, but I hope the slides are self-explanatory. There is at least one typo that flips the sign of an idea, and I would be happy to clarify anything. I appreciate the standing offer of a soap box for my actual point estimates. I have a hideous schedule the next couple of months, but will absolutely maintain the idea on the back burner.
As you mention on the blog, a point estimate is in some ways more helpful than generalities. If I offer a point estimate, I will almost certainly be wrong. As I suggest in the slides, a fall of 30% over the next two years would not shock me at all. But I don’t think that’s the highest probability outcome. I would put something like 20% probability on a rise in home prices of 15%+ over the next two years. Not more than 40% probability of the giant drop in my mind. Between the two extremes I don’t have much to say. For the most part, prices here are driven by demand, and what people are willing to pay is in large part determined by what other people are willing to pay. That means that at any given date there must be “multiple equilibria.” External events like interest rate changes, mortgage generosity, and GDP fluctuations matter, but (a) I am not a macro forecaster and (b) I don’t think forecasters know much right now. Look at the S&P 500 over the last year: the market doesn’t know the right level within 20%, and I would guess that “smart money” drives stock prices more than it does home prices. Summarizing: I can’t tell you much you don’t already know.”
– Tom Davidoff
“You asked a specific question about a 58 year old.
If that 58 year old were an empty nester planning to exit Vancouver within 3 years, I would encourage her to think about cashing out and
renting. Why gamble with most of her wealth?
If she were planning to die in her Vancouver home and didn’t want to downsize, I would be reluctant to tell her to get out.
If she were rattling around a 5 bedroom home on the West Side but wanted to die in Vancouver, I would tell her to sell.
– Tom Davidoff
Your probability weightings regarding future prices aren’t a million miles from mine…
I do lean more towards a higher chance of a big correction (I’d put it more at 60% chance), but agree there is a modest chance of ongoing strength.
And I agree with your estimations regarding the different possible 58 year old scenarios.
The crucial thing is that people can own in comfort if they are capable of withstanding a substantial downswing:
both from the point of view of whether their fiscal health is dependent on RE ‘wealth’,
and from the perspective of being able to refinance a mortgage against a devalued property.
But what are the numbers on this?
How many in Vancouver are consciously (or unconsciously) dependent on the presumed future value of their primary residence for their future fiscal well-being?
I’d estimate that it was, by now, a fairly large minority (25%? even 30%?).
Even a relatively small percentage of people in this position (say 10%-15% of total owners) could have a very large effect on the market if they try to realize paper profits in the face of a modest drawdown.
(Of course the flip side of this is how demand will respond to price drops.. I believe net demand will back off; others believe that people are waiting eagerly to ‘buy the dips’. I agree this is very hard to quantify/estimate.. we’ll simply have to wait and see.)
“I agree with your remark about dependence. A huge fraction of near retirement Vancouverites must have 75%+ of their wealth in home equity. I would guess most of these people would require a very high probability of success to gamble, say, 30% of $2 million, but by retaining ownership they are doing something pretty similar.
I suspect, but don’t know, that home equity extraction has fed a lot of spending by locals here. I have put zero effort into looking at the
“home ATM” phenomenon here, but someone should.”
– Tom Davidoff