I came across this chart at Clusterstock this morning. I’ve published it before but that was a number of months ago. It is always worth taking a look at.
The next time you hear a politician talking about the need to arrest the fall in housing prices, refer back to it. As it amply demonstrates, we have not yet reached the sort of historical correction that we should see in housing prices so all they are really saying is that they want to postpone the inevitable.
We still have quite a ways to go.
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Why would one only factor in inflation. What about real gains in income from productivity gais. We have much more income in real terms than we had in the past, and can therefore afford to spend much more on housing. We can even afford to spend a bigger part of our net income on housing. This factor as well as a "preferrence" factor is not considered by Schiller.
Anyone who looks at this and believes this real estate catastrophe idea needs to step back and digest the information. First question to ask, why are we relating home values to inflation? Second question to ask, do you really care? If you don't care, why should anyone else?
The two main variables I would look at to determine the long-term sustainable median home price is a ratio of nominal home prices to nominal income: more simply, an affordability ratio. Take a look at this graph as I first saw from Tim Iacono: http://static.seekingalpha.com/uploads/2009/1/22/...
I am slightly optimistic that a bottom can be reached in a few months.
I'm a fan of affordability ratios as well and take some comfort in the fact that they have improved a great deal. The problem you run into with the ratio right now is that the median home price is badly skewed. Most of the sales activity has been at the lower end of the price spectrum so from an historical perspective it's presenting something of a false picture.
I hope you are right that a bottom can be reached shortly but I don't think i'm as optimistic as your are.
Hmm. I think this is a suprrious graph. I don't think homes in 1900 even had bathrooms. To the outhouse men!
David and Marty mentioned productivity gains and improvements in housing. For most of the '90's, the index stood around 110. Has worker productivity increased enough SINCE THEN to justify the increase? Have houses improved enough SINCE THEN to justify an increase from 110 to 200?
No.
But we also spend much more on other things, like vacations, eating out, etc, much more than a couple of decades ago. Also tuition and health care have outpaced inflation. All these new spending patterns leave even less for housing.
Why pick an arbitrary date like 1990. One can pick dates with high home prices or low. The chart starts in 1890 and purports to make a case that prices must come back down to the level of 1890 adjusted for inflation. This is just plain silly. Things have changed. Both in terms of real incomes, but also in terms of how strongly one desires to own a home.
David,
I think that Shiller put together the chart covering such a long term period in order to show the trends throughout a number of different economic conditions. I don't think it suggests that we should or would revert to the 1890 level. On the other hand there is a pretty discernible mean from about 1950 on and prices show a tendency to revert to that mean.
Reversion to/(toward) the mean. That's what the graph depicts. That's what needs to happen. Housing (home pricing) should not be so far out of range to the rate of inflation. It has artificially inflated by: affordable housing initiatives, and cheap easy credit creating excess demand. Demand has waned, supply has increased (surplus), and pricing must fall (further).
Demand hasn't just waned, it's been destroyed. The 1st time home buyers were forward buying maybe 5-10 years ahead of schedule, hence the bubble. They won't get back into the game anytime soon when they fall out – many empty homes. Plus the recession/depression – demand will be non-existent.
In 1982 the Bureau of Labor Statistics (BLS) began modifying the method for calculating the Consumer Price Index (CPI). Economist John Williams at ShadowStats.com publishes an Alternate CPI that employs the method used by the BLS from 1913 to 1982. The above graph should also be shown adjusted by the ShadowStats. I believe the peak in 2006 would not be so pronounced in this case.
I'm familiar with the change that the BLS instituted. It tends to understate inflation. I don't think it makes any difference with respect to the chart. Shiller just one deflator for the entire period. Given that methodology the period changes aren't distorted by changes used to calculate CPI in various times.
Shadowstats was debunked. http://www.econbrowser.com/archives/2008/09/shado...
Shadowstats just adds 7% to whatever the BLS publishes, and charges $175 for it.
http://www.econbrowser.com/archives/2008/10/shado...
Uhhh, TomLindmark1, you need to think about what you just wrote. Correcting data for a phenomenon is fine as long as you're consistent over the entire period in question. You can't change the correction factor midstream.
My mistake TomLindmark1, I wasn't aware that Shiller wasn't simply using the BLS CPI.
What inflation index is used to correct the graph's data?
[...] was an interesting chart of home prices posted recently, so I thought I would share. You can see that we could have a long way to [...]
Can't see how this chart is correct. If you do the same analysis for land value over the same period you see significant real appreciation. Rational seems clear: fixed supply, increasing demand.