“A History of Home Values” graph by Robert J. Schiller

[vcguy_10]

Asianautica, you’re absolutely right. It’s eerie to see how the post WW II run-up in prices was much more pronounced than the two booms in the late 70s and late 80s. However, prices didn’t really drop following that great boom!

A market observer may have witnessed a ridiculously sharp (60%) appreciation in 1943-47, then sell at the peak (index=108) and become a renter, waiting for prices to drop. After all, look at the 1920-1945 average (index=74). “Prices are overpriced by 30%” our friend from the past may have thought. Other than a minor adjustment in 1948 or so… it appeared that the post WW II boom resulted in a “permanent new high plateau” as seen from 1950-1975.

[PD]

I noticed that too. However, you could make an argument that prices were too low. They may have been unnaturally depressed during that time and recovered after WWII. Look how long RE has been depressed in Japan.

[Bugs]

That time span represented the single largest shift in homeownership in our nation’s history. That same spike fueled the baby boom and ushered in the era of car ownership for everyone. Despite this, the breadth of that increase still pales in comparison to our latest spike. Has anyone here taken note of any fundamental changes in our society that would indicate we had an superabundance of pent-up demand coming into 1997? I haven’t.

[vcguy_10]

The point here is that we don’t really know what the future will bring. Market timing is foolish. Other than that, we do know that today (2005-2006) is a bad time to buy a house. When will it be a good time? That’s anybody’s guess. The best I can do is buy when it makes sense to me, both financially and personally, and not expect to time the market so that I can make a killing.

It was misguided treating your house as an investment vehicle on the market’s way up (all those GFs inflating prices more and more). Now that the bubble has bursted and we have x years of depreciation ahead of us, it’s still not a good idea to think of your house as an investment.

PD made the point that perhaps houses were too undervalued in 1920-1945. Perhaps. But a similar argument could be made of 1980-1997: that high interest rates and a booming stock market had kept money away from housing, making house prices artificially low, and that only in 2002-2004 prices reached their “true” level. I don’t believe the latter is the case. The point is that making predictions is very difficult, especially predicting the future, as Yogi Berra said.

[sdduuuude]

What an interesting picture.

Columbo’s comments about taking this with a grain of salt are important, but it is a respectable bit of work and is the best picture we have at the moment to go that far back.

There are so many ways to analyze it incorrectly, I don’t think I’ll even try.

But – I will remind you: In 1997, the US government changed how home sales were taxed, which made home ownership more valuable because one could reap more cash from a sale, after tax. I believe some increase in prices are justified at this time.

I mean, if I buy a $200,000 house in 1996, thinking it will double in value by 2006, I can expect to make a $200,000 profit. But I have to pay %25 cap gains tax, so I only make $150,000 profit, over and above the sales price.

But in 1997, I can expect to make $200,000 when I sell it in ten years. This is a 33% increase in profit.

This means I would be willing to pay more, to the tune of $233,000 to purchase it and receive the same return. This is a 33% increase in the value of the home to all buyers, based only on the tax break.

Something to think about.

Powayseller isn’t allowed to like this graph cuz Schiller is from Yale and she doesn’t buy that Ivy League Stuff.

[sdduuuude]

Didn’t the FED change from limiting supply to controlling interest rates in the late 70s – or something like that (sorry, my macro econ isn’t that good)?

One can see how this artificial intervention de-stabilizes the market.

[vcguy_10]

Sdduuuude, I guess you do remember something from econ 102! Actually, Volcker’s Fed policies changed from targeting interest rates to targeting growth in the money supply. The objective at that time (1979) was to defeat inflation, which was out of control. The unfortunate downside was that interest rates shot up to extremely high levels. But high inflation was defeated once and for all.

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