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Back from the dead…courtesy of Altos Research

Kevin Boer, Broker Owner, 3 Oceans Real Estate, Inc. ()

November 30th, 2006 · 12 Comments

Though temporarily put out of commission by a mild form of the Martian Death Flu that recently afflicted Kris Berg — and perhaps an overdose of Thanksgiving Tryptophan, not to mention a stronger-than-expected Q4 — I came to life upon seeing Mike Simonsen’s insightful post on the relationship between Palo Alto home prices and the NASDAQ.

I thought I’d take myself up my own challenge (posted on Mike’s blog) of seeing how well that pattern fits going further back. The result? Broad-stroke parallels useful for thinking about large trends, but (alas) no neat regression-based formula that would help you to predict, say, next month’s median prices. (Of course, if I had found something like that, trust me, I would not be posting it on my blog! I’d run as fast as my legs could carry me over to Sand Hill Road and hit up some VC’s for a few billion dollars to buy and sell Palo Alto real estate!)

Here’s the chart comparing Palo Alto median home prices with the NASDAQ; both numbers are indexed to 100 = February 1997.

The key observation seems to be that, very roughly speaking, NASDAQ’s movements are followed several months later by corresponding movements of about half the magnitude in Palo Alto prices. In other words, when the NASDAQ starts trending upwards, Palo Alto prices start doing the same a few months later. If the NASDAQ’s climb ends 50% higher, Palo Alto’s ends about 25% higher. Observe: (Numbers refer to chart below.)

  • 1 to 2 The NASDAQ , as we’ll all recall, had a glorious run, peaking in February 2000 at a level more than triple its February 1997 level; Palo Alto prices also had a glorious run during that time, though the peak took place a few months later and was “only” 2.5X higher than in February 1997.
  • 2 to 3 The NASDAQ’s initial plunge from February 2000 to May 2000 shaved roughly 30% off its value; in response, Palo Alto prices dipped 13% from June to September 2000.
  • 3 to 4 The NASDAQ’s brief rally from May to August 2000 was followed by a brief home price rally from September to December of the same year.
  • 4 to 5 Following its brief rally, the NASDAQ went into free-fall from August 2000 through September 2001, during which it lost over 60%. Palo Alto’s corresponding price drop started a good 6 months later and ended in December 2001 30% lower.
  • 5 to 6 The NASDAQ had another brief rally through November 2001; Palo Alto waited till December and climbed for a good half year.
  • 6 to 7 Unable to sustain itself, the NASDAQ dropped 40% from January to September of 2002; Palo Alto prices fell 18% from July 2002 through January 2003.
  • 7 to 8 With a few brief interruptions, the NASDAQ has been marching slowly upward from September 2002 through now, slightly more than doubling during that time. From February 2003 through now, Palo Alto prices have climbed by about 50%.


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12 responses so far ↓

  • 1 Athol Kay // Dec 1, 2006 at 11:35 am

    Well crap, if the Martian Death Flu could only last a full Carnival cycle…..

    It’s very convincing 1997-2003. The last two years though it seems a little hazier though.

  • 2 Altos Research Real Estate Insights // Dec 1, 2006 at 1:23 pm

    Palo Alto Real Estate Projections? Watch the NASDAQ…

    It’s amazing the insights customer conversations drive. I’ve had more than one inquiry lately about the price swings we’re recording in places like Palo Alto. Why are prices climbing when all the headlines declare the bubble exploding? Here, loyal…

  • 3 JeffX // Dec 1, 2006 at 1:44 pm

    Your content is fantastic Kevin…Great Mash-up…
    Have you seen any other markets via Mikes info that may trend similarly to (other) major indexes? Fascinating data…people have been trying to tie in the stock market to the real estate markets empirical data for years…
    Although theres no practical regression formula, the RE markets have innately ’slower’ capital velocities, it’ll be interesting to watch this going forward….

  • 4 The XBroker » Blog Archive » More X-Rated Musings…. // Dec 1, 2006 at 2:37 pm

    [...] And that leads to, Kevin at 3 Oceans for a further dissection of one of Mikes posts about the similar trending of the NASDAQ compared to Palo Alto real estate prices. Fascinating! [...]

  • 5 Greg Coladonato // Dec 1, 2006 at 7:27 pm

    Hey Kevin, as always, a great insightful post.

    BTW, I disagree that there is no neat, regession based formula for predicting home prices. In fact, I suggest you run a regression of PA medians against 3-month and 6-month lagged NASDAQ values and allow for the general uptrend in home prices. You will get predictions for future medians — whose accuracy you can test and publish on your blog! :)

  • 6 Kevin Boer, Three Oceans Real Estate // Dec 1, 2006 at 10:23 pm


    I’ll give it a go, but I have to confess I’m pretty skeptical. If a regression formula like that existed, somebody would have already discovered it and made a fortune. The real estate market is efficient enough to take care of that.

  • 7 Kevin Boer, Three Oceans Real Estate // Dec 1, 2006 at 10:40 pm

    Greg, there may be a non-linear regression that sheds more light, but a simple linear regression of median home prices vs. NASDAQ yields very low R^2 values.

    Medians vs. NASDAQ : R^2 = .01
    Medians vs. NASDAQ 3 months lagged: R^2 = .04
    Medians vs. NASDAQ 6 months lagged: R^2 = .08

    Any suggestions on some non-linear regressions to try? Perhaps on the natural log?

  • 8 Kevin Boer, Three Oceans Real Estate // Dec 1, 2006 at 11:39 pm

    Athol, you’re absolutely right. It’s at best a general trend; I certainly wouldn’t recommend for or against buying a particular property in Palo Alto on the basis of this analysis!

  • 9 A leisurely ride through the Carnival at Three Oceans Real Estate // Dec 4, 2006 at 10:45 pm

    [...] My Resurrection Post, in which I thank the good folks at Altos Research for playing a role in my recovery from the Martian Death Flu and then return the favor by extending their analysis on the NASDAQ vs. Palo Alto home prices. [...]

  • 10 Just what exactly does the Lesotho Loti have to do with Palo Alto median prices? at Three Oceans Real Estate // Dec 5, 2006 at 5:39 pm

    [...] Pat Kitano notes with his usual insight that spontaneity is both the joy and bane of blogging.  In a rush of post-Martian Flu exuberance, I showed what looked to be a pretty neat correlation between the NASDAQ and Palo Alto median home prices.  Alas, the spontaneity of that moment led me to not dig quite deep enough… [...]

  • 11 The San Diego Home Blog » Blog Archive » The World According to Kris - 2006 in Review // Jan 1, 2007 at 10:43 am

    [...] Inman News reports that Southern California home sales are down for the 11th straight month, which is the weakest pace in a decade. I get the Martian Death Flu, and now regret not having trademarked the name, as everyone seems to have it. Greg Swann asks me to join the Bloodhound Blog as a contributor, and I’m just a girl who can’t say “no”. [...]

  • 12 3 Oceans re-finds its bearings // Jan 18, 2007 at 7:10 pm

    [...] Last time I went AWOL for a week, I blamed it on the Martian Death Flu.  This time, fortunately, it was because I was busy finding another warehouse for all the ramen.  At any rate, I’m back… [...]

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