tag:blogger.com,1999:blog-27951078.post-17968872916146686332008-05-11T06:04:00.000-06:002008-05-11T06:04:00.416-06:00<span style="font-size:130%;"><span style="font-weight: bold;">Digits are destiny...</span></span><br /><br />A great debate is going on in the economic and investor community about the status of the American housing market. Has it <a href="http://news.google.com/news/url?sa=t&ct=:ePkh8BM9E2IF2mHAArEFyE4yYAVRJQZsQixCTKk5QhxaLG6JRbkQfkGqELcTq5mhpZGJx9SXOiCVuQasMPuNBG562kkpdBW9nM3XuPzshWltv9iARvxiY83JT04E0sxFqckAt54cjQ/6-0&fp=4826e17d7e58221f&ei=6DsmSKmOHZfw8ATwlbW9Dw&url=http%3A//www.unionleader.com/article.aspx%3Fheadline%3DHousing%2brebound%2bon%2bthe%2bway%252C%2bgroup%2btold%26articleId%3Dcc6fd1da-8dc6-4346-89e2-304d5a1c52c9&cid=0&sig2=VrQcESvCOk_IzX8sWzxoCQ&usg=AFrqEzf1G6Fprb1rECl1VF_FUpiSh_AU5A">bottomed</a>? Or is there even more <a href="http://news.google.com/news/url?sa=t&ct=:ePkh8BM9E2IF2mHAArEFyE4yYAVRJQZsQixCTKk5QhxaLG6JRbkQfkGqELcTq5mhpZGJx9SXOiCVuQasMPuNBG562kkpdBW9nM3XuPzshWltv9iARvxiY83JT04E0sxFqckAt54cjQ/3-0&fp=4826e17d7e58221f&ei=6DsmSKmOHZfw8ATwlbW9Dw&url=http%3A//www.dallasnews.com/sharedcontent/dws/bus/stories/051008dnbushousingrebound.e35f4a5c.html&cid=0&sig2=z_lVE_OheVCstxgxg4T8Qw&usg=AFrqEzcWgUOYlyxrmRhIgP5niYrOQY7HpA">depressing news to come</a>?<br /><br />Regardless of your particular prognostication, consider the graph below from <a href="http://www.economist.com/finance/displaystory.cfm?story_id=11333030">an article on the geography of the house price mess</a>.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://bp3.blogger.com/_t8NkgQdUKDk/SCY5QtS9KRI/AAAAAAAAAXg/Z2BqnTYKYqQ/s1600-h/rents.gif"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="http://bp3.blogger.com/_t8NkgQdUKDk/SCY5QtS9KRI/AAAAAAAAAXg/Z2BqnTYKYqQ/s400/rents.gif" alt="" id="BLOGGER_PHOTO_ID_5198905779045607698" border="0" /></a><br /><br />Note that <span style="color: rgb(204, 0, 0);">the long term <span style="font-weight: bold;">rent-to-price</span> level seems to wander around 5%.</span> It struck me because I've always used 5% as the quick-and-dirty factor between <span style="font-weight: bold;">cash rents and land prices</span>: $300 rents are to be expected for $6000 dirt.<br /><br /><span style="font-style: italic;">Or vice-versa.</span><br /><br />What if <span style="color: rgb(204, 0, 0);">5% is some kind of embedded value in our brain</span>, and we revert to it as nominally fair over the long-long term for any kind of capitalization problem? I think that could be the case for a simple reason: <span style="font-weight: bold; font-style: italic; color: rgb(204, 0, 0);">it's easy to calculate in your head</span>. Double the rent and add a zero. Or halve the price and lose a zero.<br /><br />In the heat of deciding what's fair, rules of thumb can take over if time is of the essence. <br /><br />We could be simply trapped in a decimal system and wedded to 5% <span style="color: rgb(204, 0, 0);">because we have ten fingers</span>. If we were <a href="http://en.wikipedia.org/wiki/Octal">base-8</a> for example, we'd settle for...<span style="font-weight: bold;">don't rush me now</span>...carry the two...and , ummm...something else.<br /><br /><span style="font-weight: bold; font-style: italic;">Look, it's just a theory.</span>John Phippshttp://www.blogger.com/profile/03245790061133614986noreply@blogger.com