We periodically look at some other valuation measures besides only looking at price series. The exhibit below illustrates inflation adjusted S&P/Case Shiller and median household incomes. This uses the lowest price tier. In April, the average home under $151,160 was about 1,400 sq.ft. This segment is selling briskly. With the price adjustments away from those ridiculous days of 2006, values have returned to where they seem to make sense for a lot of people. Currently, the price-income ratio has returned to 1994 levels. That seems like a pretty deep correction and it is. However, this is not the whole picture since we understand that there is a relevant over-supply condition and some demand side factors such as credit availability. Further, income may turn out to be weak in 2009 (the latest available is 2007 as 2008 numbers should be released this summer) and this will help elevate the ratio. While keeping in mind these factors, we still have somewhat of a gut check that tells us that while values may slide further, they are no longer absurd and that it may make sense to buy within these levels if you plan to own for the long-term.

In a different industry but related theme, I noted key differences between fundamentals traders and technical traders in futures and options and stocks. One of these differences was that the fundamental traders took a position based on evidence like size of supply and historical demand and related factors that they collected which provided a thesis for trade. I tend to agree with fundamental traders in a lot of ways. Technical traders, often called chartists, looked at patterns and formations in the price series themselves, often employing tools such as Fibonocci series or moving averages. I tended to disagree with the utility of a lot of these methods. However, I witnessed a lot of fundamental traders crash and burn because the stuck to a position that was failing and would not admit that their interpretation of the fundamentals was flawed. Technical traders, while there thesis appeared weak to me, seemed to have better money management skills. They often had pre-established entry and exit scenarios and as a consequence of a failed prediction, once their parameter was met, they were out. Settling on your risk appetite, finding the entry and exit points and sticking to it carries over to real estate as well, only with a far longer time horizon.

At some of the price points offered in the current market, I don't care if I hit the exact bottom or even that near it. At some of these price points, I figure I know how much I am going to loose, that way if I am wrong about the upside, I can live with my mistake. I am happy that I did not buy anywhere near the peak and would be happy to buy on the other side of the trend.