Sunday, May 11, 2008

Digits are destiny...

A great debate is going on in the economic and investor community about the status of the American housing market. Has it bottomed? Or is there even more depressing news to come?

Regardless of your particular prognostication, consider the graph below from an article on the geography of the house price mess.

Note that the long term rent-to-price level seems to wander around 5%. It struck me because I've always used 5% as the quick-and-dirty factor between cash rents and land prices: $300 rents are to be expected for $6000 dirt.

Or vice-versa.

What if 5% is some kind of embedded value in our brain, 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: it's easy to calculate in your head. Double the rent and add a zero. Or halve the price and lose a zero.

In the heat of deciding what's fair, rules of thumb can take over if time is of the essence.

We could be simply trapped in a decimal system and wedded to 5% because we have ten fingers. If we were base-8 for example, we'd settle for...don't rush me now...carry the two...and , ummm...something else.

Look, it's just a theory.

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