Silicon Valley's estimate of the crisis

Rod Dreher posts about the bad news from Silicon Valley, based on a presentation made by Sequoia Capital, a very successful venture capital firm, to the companies that it funds. You can see the slides from the presentation here; no transcript is available, but you can easily intuit that the messages is “batten down the hatches, hard times ahead.”

One graph in particular caught my eye, showing that from 1930-1997 the growth in house prices was a fairly steady 0.7% per year, but in the eight years following it increased more than tenfold, to an 8% increase every year. If you assume that those years were a bubble and assume that housing prices should have grown at an 0.7% rate, then over that time houses should have increased by 6%, rather than the 85% they actually increased. Put another way, 2006 housing prices need to drop by about 40% to get back to where the normal trend would have put them. (This assumes, of course, that I did the math right.)

One other thing strikes me about this graph. Rather than a steady 0.7% rise between 1930-1997, it looks like there was a huge jump just after WWII, followed by nearly flat prices from 1950-1997. From that you might make the case that, all things being equal, housing prices should normally never go up.

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(Source: Robert Shiller)

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