Reversion To The Mean Is A Myth

On today’s show we are asking the question “Are we in an orderly market?”

Market volatility can be a function of exaggerated trading activity. In extreme cases, it can be the result of market manipulation.

In the world of real estate, there are those market experts who are saying that we need to look at the long term averages. If you look far enough back you can construct a rolling average. This thinking says that over the long term, home prices cannot exceed an average price to income ratio. Things will return to normal.

If a household spends more than 30% of their household income on the cost of housing, then the cost is not sustainable. It’s not normal.

But if that were true, house prices in cities like San Francisco, San Diego, Toronto, Vancouver, New York should not be anywhere near the levels that have been present in those markets for decades.

There must be something else in play.

These experts will tell you that eventually, over time, the prices will revert to the mean. Prices might fall below the mean for a period of time, then exceed the mean for a period of time. But eventually, prices always revert to the mean.

I personally take issue with mean reversion theory. The problem with averages is that very few properties actually represent the average.

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Host: Victor Menasce

email: [email protected]