Interesting observation on a graph

[rb_engineer]

Below is Shiller’s house price index over the last 100+ years. It indicates that once housing prices make a big move, it tends to stay there for a long time, for more than 30 years at a time. This graph tells me that price change to pre 2000 levels are highly in doubt. Any thoughts?

[img_assist|nid=4765|title=Housing price index adj for inflation|desc=|link=node|align=left|width=466|height=379]

[lendingbubblecontinues]

This graph tells me that there are a lot of “owners” out there who are about to shit their pants when they see how far prices fall over the next several years;)

[LA_Renter]

Look at this plotted to a Roller Coaster, Enjoy!

http://video.google.com/videoplay?docid=-2757699799528285056

[(former)FormerSanDiegan]

I don’t really buy that, when there are so many other flaws.

For example, I’m pretty sure that the basket of goods used to track inflation has changed a lot since 1890.

One problem with Shiller’s chart is that it is based on official (understated since the mid 1990’s) inflation numbers.

Also, for those expecting another Great Depression, based on this history it’s a good time to buy a house. During the Great depression house values exceeded inflation by a cumulative ~15% over an 11-year period.

[(former)FormerSanDiegan]

Personally, I prefer looking at prices of homes relative to renting the equivalent to ascertain value, not an academic exercise, which is misinterpreted by the original poster to mean we are at a new higher plateau.

Also, can someone ‘splain to me what a standard house was in 1890, and how to compare that to a standard house in 1975 ? Did they have Almond refrigerators and electric olive green ovens in 1890 ? What about shag carpet ? What about typical LTVs for loans prior to 1940 ? Has that changed over 120 years ? What were the FHA guidelines in 1915, or 1960 for that matter ?

The problem with a “statistic” like Shiller’s is that the system is not stationary over the length of the record he is analyzing. I would only consider the last 20-30 years of this chart, and I would also consider it with a large grain of salt, since inflation and changes in income distribution
are not considered.

[little lady]

“This graph tells me that there are a lot of “owners” out there who are about to shit their pants when they see how far prices fall over the next several years;)”

AH hah hahahahahahahhlol! HYSTERICAL!

[Anonymous]

The move that you see beginning in the early-mid 40’s had a lot to do with not many being homes built during the depression years in combination with soldiers coming home and using the GI bill to buy houses. Is there a similar, sustainable shift that explains/supports how our current increase in house prices will do the same?

[PadreBrian]

hahaha, only if returning GI can buy a 800k+ home!

lol

[davelj]

I agree with FSD, focus on rents. It gets more to the only two really relevant questions in valuing assets: Where is the cash? How and when do I get it?

Following the rents will also help to cancel out any artificial inflation differentials.

The problem is that when you focus on rents, housing is still ridiculously overvalued… albeit not as much as Shiller’s graph would have us believe.

[donaldduckmoore]

rb, you cannot generalize the trend with your argument. Some of the movements were relatively short-lived. The booms in 70s and 80s are good examples. There are many factors involved and one may need to analyze the factors in detail to tell what makes a rise or a bump stays that way.

[sdduuuude]

Every time I see this graph, I can’t help but think that the 1997 change in capital gains taxes on proceeds from selling a primary residence didn’t have some kind of permanent affect on housing prices.

Of course, that tax law change doesn’t account for all of the gains you see here, but it is something to keep in mind.

Other than that, this graph is more diconcernting than comforting.

[Bugs]

If we were discussing this graph in 2005 we wouldn’t have the same perspective that we have right now. That graph isn’t current, and as our recent history proves, prices didn’t level off after all.

The prices are already in decline, particularly here in SD and Riverside counties. They’re already dropping at a relatively fast pace, faster than they did during the 1990s. This trend hasn’t reached maturity yet, which is the only reason some people consider it inconclusive, but it’s just a matter of time; and right now time is not on the bulls’ side.

You can tell this is going to be a big correction by the time its all over because of how far it’s come in the last 24 months and how quickly it’s picking up steam now. We’re not even close to peaking out the bad news meter.

Don’t forget, in addition to everything else that’s going on, we have a huge wave of Boomers who will be retiring starting in 2010 and who will have far too few assets (by then) to retire in place. Even the demographics are running against the idea that prices will stabilize at a higher plateau.

[bubble_contagion]

Remove the section of the curve between WW I, the Depression and WW II. Now look at it again. Very scary.

[(former)FormerSanDiegan]

If we were discussing this graph in 2005 we wouldn’t have the same perspective that we have right now. That graph isn’t current, and as our recent history proves, prices didn’t level off after all.

Excellent point, Bugs. In San Diego for example, the Case-Shiller index is off about 8% over about a two year period. Factor in another 6-7% inflation and KA-BOOM, you already would have nearly a 15% decline from the peak.

[rb_engineer]

Here’s S&P 500 adjusted for inflation:

[img_assist|nid=4769|title=S&P 500 adjusted for inflation|desc=|link=node|align=left|width=466|height=356]

Is there a possibility that in the mid 90’s, something drastic has happened?

[Author]

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