Financial Tsunami: USA Real Estate is Not to Blame

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

February 2009


Many link the current global financial crisis to sub-prime mortgages and thus in a way to the real estate market in the USA. No doubt there had been huge speculations in some cities or states resulting in skyrocketing home prices and it was only a matter of time before such markets suffered a correction.

However, if it were not for the fact that mortgages were imprudently approved, and if it were not for the fact that somehow someone securitized and packaged such doubtful mortgages, along with other doubtful financial instruments, into CDO and the like, the crisis might not have become of such immense scale and speed.

The USA real estate market is not really the one to blame. Why? This is because overall the market has not really gone mad. In selected markets such as those in California or Florida, it is a definitely yes. Across the entire country, it is a no. Here are some figures and calculations:

A)      Data sources = the USA data comes from the website of the Center for Real Estate at the Massachusetts Institute of Technology and the Hong Kong data comes from the Ratings and Valuation Departmental website of the Hong Kong government.


B)      From 2001 to 2008, the overall USA real estate market has risen less than 100% = and this applies to the residential apartment sector (peaking at 94%), the industrial sector (92%), the office sector (77%), and the retail sector (95%). In roughly the same period from 2002 to 2007, the Dow Jones Industrial Average rose from a low of around 7,400 in 2002 to a high of around 14,000 in 2007 i.e. roughly the same as that of real estate. Do note we are talking about the residential (rental) apartment sector here, not the home buying one. 

The point here is that the overall USA real estate market has not been ¡¥performing¡¦ immensely better than other assets and IF the stock market was any reflection of economy activity, the real estate market as a whole was only playing along, that¡¦s all.

C)     Now what would a crazed real estate market look like? = Try Hong Kong from 1990 to 1997. Within that period, the residential sector had gone up 300% (i.e. compared to the 1990 price level, the 1997 price level was 4 times as high), the office sector 150% (2.50 times), and the retail sector 250% (3.50 times), with only the industrial sector having an increase less than that of the USA seen recently. Naturally the comparisons here are not perfect as there are differences in market structures, timings, and product types.

The point here is the USA real estate market overall has relatively modest increases.

D)     The overall market price levels in the various sectors are now within their ¡¥standard deviation¡¦ spectrum and have passed their peaks = this in itself does not imply there will be no more downward adjustments, just that the chances for a unimaginable shock could be much reduced. Here are the charts on the 4 market sectors of residential apartment, industrial, office, and retail.

Do note the above concerns only the period from 2001 after the high tech bubble burst and when interest rates dropped significantly and if earlier statistics were to be included, the various averages and standard deviations would likely be different. Note also the debate on using standard deviations and linear assumptions.

E)      IF the markets are to head south further, how much? = this is a million dollar question (take your pick of currency), and your humble author has no answer. But he could share his guess. Look at the charts above.

If the market is ¡¥lucky¡¦, then we may view the average price index level as the next line of defense. If the market is to be ¡¥unlucky¡¦, then we may use the lower standard deviation price index level as a second line of defense. The 1st line means a further drop of around 18%, while the 2nd line implies a further overall drop of around 36%.

Can prices drop less than 18% or more than 36%? Certainly, the chances always exist but your humble author thinks in this way; any drop less than an overall 18% requires us to be ¡¥luckier¡¦, or some more economic packages which will really work (cross your fingers), and any drop more than 36% requires very bad luck, or the assumption that the US dollar will stand firm and not change no matter what.

As to which is likelier, the 18% end or the 36% end? Your humble author bets on the latter.

Why are there no price increase options? Hmm¡Kare you kidding?

Important: 1) USA map: courtesy of; 2) Read past article ¡¥Which one to sell, buy, or wait?¡¨ at

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

 Back to Home  /  Back to Simple to Read Stuff Section

¡@ A Service of Zeppelin Real Estate Analysis Limited of the Zeppelin Group of Companies
Phone (852) 37576388 Fax (852) 37576399 E-mail
Address c/o Zeppelin, Unit 1007, 10/F, CCT Telecom Building, 11 Wo Shing Street, Shatin, NT, Hong Kong
Copyright rests with Zeppelin and/or relevant authors