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Three Cents Worth: G.D.P. as a P.D.G. Real Estate Indicator

[This week, chartman Jonathan Miller, tackles the relationship between the year-over-year change in US gross domestic product (red) and the in the Manhattan median sales price (blue line). The x-axis runs from the first quarter of '89 to the second quarter of '05. The y-axis runs from 0 to 12% million for GDP and -40% to 50% for sales price.]

There are a plethora of economic indicators that numbers crunchers like me follow to gauge the direction of the real estate market. US Gross Domestic Product (GDP) has never been one of them, but maybe it should be.

I usually cite such indicators as mortgage rates, job creation, productivity, payroll, federal deficit, consumer confidence and CPI. When I was speaking to a group of real estate brokers last week, one of them mentioned that GDP was helpful to him to interpret the real estate market.

[After the jump, GDP like you've never seen it used before.]

GDP is the output of goods and services produced by labor and property in the US. As an observer of the real estate economy, I had never considered GDP helpful, because it is diluted and broad-based. Performance of the overall economy should influence housing prices, but external influences like bubble talk, politics, natural disasters, war, etc. can provide distractions in the data.

None-the-less, I charted GDP quarterly by comparing the percent change compared to the prior year quarter against Manhattan median sales prices.

Guess what? Over the past 15 years, the patterns between the two indicators were very similar. The only significant exception was from the end of the 2000 to the end of 2001. That’s when the NASDAQ bubble burst and US GDP dropped, while Manhattan Wall Street bonus money earned from the prior year kept local apartment prices rising.

I suspect I am breaking some fundamental rules of economics in this comparison because the US GDP is seasonally adjusted and the Manhattan Median prices are not–but I already have issues with seasonal adjustments. Also, the scales of the two indicators are very different yet the trends are similar.
· US Gross Domestic Product v. Manhattan Median Sales Price [Miller Samuel]