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Real Estate Valuation
Time Varying
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How
To Make Rational Decisions |
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(Applying Infinite Spreadsheet Experience In Real Estate
Prediction To Stock Investment)
(Infinite Spreadsheet (Pat. No. 6,078,901) http://post-science.com)
The Infinite Spreadsheet relates
the price to all the factors affecting the price in a time space
extending to infinity. It has correctly predicted the
under-valuation of the real estate market in the 1970s and
over-valuation in the 1980s and 1990s. In particular, it has
predicted the US Savings and Loan Crisis. In sum, it has
demonstrated both in theory and in practice that the real estate
market is almost always wrong, a fact which simply reflects that
mathematics is generally more trustworthy than human judgment.
Real estate over-valuation is caused by real estate inflation,
which leads to overbuilding, resulting in the decrease in rent
growth. Conversely, under-valuation is due to market price
crashes, which discourage new constructions, resulting in housing
shortage and rent surge. The real estate market provides the
Infinite Spreadsheet with all its inputs, except two, namely, the
rate of return on investment and the rate of rent growth. In
practice, since the rate of return is an approximate
time-invariant and can be obtained by past market survey, the rate
of rent growth becomes the final unknown to be determined by the
Infinite Spreadsheet through iterative calculation. If the
calculated rent growth is higher, or lower, than the actual market
rate, the market is over-valued, or under-valued, respectively.
Even though the Infinite Spreadsheet can predict the real estate
market with relative ease, the user still has to juggle the final
two remaining unknowns. A truly deterministic system, which has an
equal number of equations and unknowns, should only have one final
remaining unknown. Luckily, the stock market might turn out to be
the first price system which provides all the inputs to the
Infinite Spreadsheet, except the rate of return. Furthermore, over
its long and dynamic history, the stock market has eliminated
most, if not all, its various non-monetary elements with the
result of reducing the resistance to price readjustments. Thus,
all that the Infinite Spreadsheet has to do is to iterate all the
market given factors, until a rate of return can be found to make
the entire price system mathematically consistent. Typically, it
takes about ten seconds to calculate the rate of return, given the
price and less than one second, the price, given the expected rate
of return. Most of the calculated rates of return of stocks fall
between 10% to 30%, but roughly, out of ten stocks, one might have
a rate of return above 30% indicating very under-valued and
another, below 10% indicating very over-valued. In conclusion, the
decisions of stock investment are completely automatic, since all
the inputs are provided in the popular media for all investors.
The investment in stocks should become infallible when all the
experience gained from real estate investment is carried over to
the stock investment with the stocks of one industry or of even
one company equivalent to the entire real estate market. However,
the iterative calculation of the rate of return is not
straightforward. The calculation involves two stages and around
10,000 iterations, or about 100 per stage. First, a trial rate of
return has to be picked, and then a trial future price has to be
chosen for a time beyond which all the financial factors becomes
stable or time-invariant. Since the relationship between the price
and the return is implicit, not explicit, it is necessary, in
general, to iterate to obtain a rate of return which fits the
initially chosen rate of return. After the two rates of return
check, the calculated present price is checked with the given
market price. If the present price does not check with the given
market price, another rate or return has to be chosen and the
entire process of the iterative calculation starts again as
before, until the calculated price checks with the given price.
The Infinite Spreadsheet is just a necessary, but not sufficient,
condition for rational decision making, of which it should be a
necessary part for handling the consideration of the future
expectation to infinity in time. By quantifying the over and
under-valuation of stocks in terms of the rate of return, the
Infinite Spreadsheet provides a glimpse of the coming Age of
Social Science.
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