5

Stock prices are claimed by some/most to be "memory-less" - there is no evident correlation between past performance of a stock, to its future performance.

Do real estate prices exhibit similar properties?

  • Can you point to some places where it is stated that stock prices are "memoryless"? – DJClayworth Nov 28 '11 at 15:58
  • @DJClayworth - added link. – ripper234 Nov 28 '11 at 19:04
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For various reasons, real estate prices exhibit far more memory than stock prices. The primary reason for this is that real estate is much less liquid. Transaction costs for stock trading are on the order of 10 basis points (0.1%), whereas a real estate transaction will typically have total costs (including title, lawyers, brokers, engineers, etc.) of around 5% of the amount of the transaction. A stock transaction can be executed in milliseconds, whereas real estate transactions typically take months. Thus today's behavior is a much better indicator of future price behavior for real estate than for stocks.

2

No, at least not with specific houses. When I bought my current house, our realtor looked at the previous selling price of this house, along with the prices at which it had been placed on the market. These values influenced the amount we offered for the house. I'm sure it also influenced the amount the house had been listed at.

1

Housing prices are set by different criteria. It can become memoryless the same as the stock if the criteria used to set its price in the past is no longer valid.

For example, take Phoenix or Las Vegas - in the past these were considered attractive investments because of the economical growth and the climate of the area. While the climate hasn't changed, the economical growth stopped not only there but also in the places where people buying the houses lived (which is all over the world really).

What happened to the housing market? Dropped sharply and stays flat for several years now at the bottom. So it doesn't really matter if the house was worth $300K in Phoenix 5 years ago, you can only sell it now for ~$50K, and that's about it.

The prices have been flat low for several years and the house price was $50K, but does it mean its going to stay so? No, once economy gears up, the prices will go up as well.

So its not exactly memory-less, but the stocks are not memory-less as well. There is correlation between the past and the future performance. If the environment conditions are similar - the performance is likely to be similar. For stocks however there's much more environment conditions than the housing market and its much harder to predict them. But even with the housing people were burnt a lot on the misconception that the past performance correlates to the future. It doesn't necessarily.

  • Your example demonstrates how real estate is not memoryless. – Tal Fishman Nov 29 '11 at 16:10
  • @sheegaon - that is exactly what I was trying to demonstrate. My answer to the question is NO, if it wasn't clear. – littleadv Nov 29 '11 at 18:46
  • @littleadv: did houses in Phoenix really drop form 300K to 50K? That's odd!!! What are the prices now? – Marco Demaio Oct 16 '12 at 17:21
  • @Marco I bought several properties priced between 20K-30K last year, and I was late. Year before they were all under 20K. 5 years ago they were all above 100K. Now they're about 30-40K. – littleadv Oct 16 '12 at 17:34
  • @littleadv: it's very interesting. In Italy the house prices have been running down for 3 years, (it happened also in the past) but we never get such huge drop down in prices. I'm wondering why US house market prices can fluctuate like stock markets. I suppose in big metropolitan area like NY they do not drop that far. I mean there'll be always someone who wants to buy/rent an house in NY. – Marco Demaio Mar 1 '13 at 13:56
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I would argue no. It's easy to correlate home prices based on size, neighborhood, school district, condition and other factors, such as property taxes. In fact, real estate people and government assessors use those characteristics to assess property value.

The demographics of a home will drive desirability/demand for the property. Combine that with the cost and availability of capital, and house prices are relatively predictable.

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