Saturday, January 7, 2012

Proof the housing price bubble has burst

In the process of updating some older charts, I stumbled across this gem, and couldn't resist posting it. It shows the inflation-adjusted price of existing single-family homes, and very clearly depicts the "bubble" in housing prices which began around 1997 (when Clinton cut the capital gains tax on home appreciation), and the deflating of that bubble which is now complete, with prices having fallen fully 39%—in real terms—from their 2005 high.

But maybe you think that prices will have to go all the way back to 1968 levels, in which case there is still another 20% decline waiting in the wings.

As a counter to that, I would note that mortgage rates today are lower than they were in 1968, and real personal incomes have increased 250% since then. Do housing prices really need to decline further? I seriously doubt it—prices are incredibly cheap by almost any measure you care to come up with. The bubble has popped, and it's time to think about how much it might inflate again.


John said...

When we bought our first house the RE agent assurred us that home values were increasing 5-10% per year. When we went to sell our house it was appraised at a lower value than the price we paid. When I asked a new agent about the 5-10% value increase, he replied "yes, that's true, gnerally, BUT NOT FOR HOUSES IN THIS PRICE RANGE."

The housing market is not monolithic, just like incomes have not increased $250 percent across the board. We live in a skewed economy.

Dr William J McKibbin said...

Real estate prices are low enough -- buy your new home using a 20% minimum downpayment and plan to live in that home for at least a decade, and yes, you will likely make out very well -- now is the time to buy cheap real estate -- downpayments of at least 20% should accompany your offers to close at rock bottom prices (what buyer would walk from a 20% earnest money check) -- I have never seen the real estate bargains that we see today -- be careful if buying real estate for investment purposes however -- take great care to avoid deferred maintenance issues and non-occupancy -- the best indicator of occupancy is an existing renter...

Dr William J McKibbin said...

PS: In formulating offers, bid very low and include a 20% earnest money downpayment -- and make it very clear that your offer is a "take it or leave it" offer -- people are selling their homes at deep discounts in today's real estate market -- go for it!

Public Library said...

Download the Zillow app on your iPhone and punch in some filters. When the map comes up in my area, it is littered with homes and condos for sale.

The health of many local real estate markets is abysmal which means the best strategy for your money is to wait and see. Prices are going nowhere but down or flat lined.

marmico said...

So 3 years later there is a floor under housing.

Good grief man. A simian throwing dart prognosticator is more accurate than you.

So how many times has the clock stopped in the last 3 years?

Benjamin said...

As always, Scott Grannis picks out interesting and informative charts and makes interesting and informed commentary.

Maybe I disagree with Grannis from time to time--so what? Maybe I am wrong from time to time, too.

Bill said...

At 9/10/2010 3:50 PM, Blogger Mark J. Perry said...

This is from a private email from Robert Higgs:

On 8/27, Marmico wrote: "It seems to me that Higgs is attempting to recreate BEA Table 5.9. There is no data for the period he is reviewing. Take it with a grain of salt or two."

Marmico, whoever he may be, is the one who does not know what he is talking about. The data shown in my 1997 article all come from the sources given there, primarily from the national income and product accounts, or are derived from them. The data are exactly what they are represented to be, and are correctly transcribed from the sources given for them.

I have just gone to the BEA website and checked the data currently displayed there on gross private domestic investment (table 1.1.5) and consumption of private fixed capital (table 7.5). If you derive net private domestic investment from these two data series, you find that net private domestic investment was exactly as

I described it in my article: negative for each year from 1931 through 1935 (except, as the BEA data are currently displayed, zero for 1935), positive for 1936 and 1937, negative for 1938, then positive again from 1939 to 1941.

I never said anything in my article, as Marmico implies I did, about gross private domestic FIXED investment. But if one uses that concept (that is, if one takes out inventory investment or disinvestment), one finds that my description of which years had negative and which had positive net private domestic investment still holds true.

Given that my article has been widely cited, reprinted in books, and used in many graduate economic history courses, Marmico might well consider making his mark as an economic historian by submitting a paper to the Journal of Economic History showing that I relied on data for a period when "there is no data." That's a pretty devastating thing to show about an economic historian of more than forty years standing in the profession. What are you waiting for, Marmico?

Would you like a banana, Marmico?

brodero said...

Apartment living can be enjoyed
only so far....

Tom said...

Another chart showing a parabolic rise in an asset class. These parabolic charts are a virtual can't miss in showing bubbles that are going to burst. I'd love someone to start a service that identifies companies, industries, asset classes, etc. that are going parabolic. It would be a great tool for identifying bubbles and shorting opportunities.

Mac said...

Buying real estate is unique to every buyer and that buying a home is a very personal decision.

buyer representation Massachusetts

Unknown said...

REO inventory at the GSEs and FHA growing out of control
"Three recent news stories strongly suggest the GSEs have too many REOs, and they are working feverishly to prevent their REO inventory from growing out of control.

First, the federal reserve has identified markets to sell bulk REOs to companies willing to convert them to rentals and hold them until the market recovers to sell off their REO inventory in bulk.

Second, the FHA has waived the anti-flipping rule again to help them clear out their REO inventory.

Third, Freddie Mac has extended the forbearance for jobless borrowers so they don’t have to add to their REO inventory.

These stories paint a picture of a federal government desperate to manage an REO inventory which must be growing out of control. To make matters worse, a federal reserve white paper states there are four times as many properties in the foreclosure process as there are currently in REO inventory. The shadow inventory of properties yet to enter the foreclosure process is many times larger than the number in process. How long can the federal government hold back the forces of the market?"

Scott - You are ignoring some fairly large supply concerns. We have room to go down further.