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Crisis In The Housing Market

The Long View: Home Prices Are Still High

Robert Shiller/via Baseline Scenario

Even now, as everybody frets about the slump in the housing market, home prices are still above historical norms.

Over at Baseline Scenario, James Kwak posts this graph of 120 years of U.S. housing prices, adjusted for inflation. (The data come from Robert Shiller, of Case-Shiller fame.)

What you see, basically, is that house prices usually keep up with inflation, and not much more. In other words, the real price of a house stays constant over time. Then, in the past decade or so, there was this crazy bubble.

Kwak lays out a few of the reasons that, even before the bubble, people thought of home ownership as a way to build wealth.

One important reason is the price illusion — people watch the dollar value of their house rise, but forget to account for inflation. Over 20 or 30 years, the nominal value of a house may rise sharply, even as the real (inflation-adjusted) value remains flat.

Another is leverage. If you borrow most of the money to buy a house (as most people do), you'll benefit disproportionately from any rise in price. Of course, you'll also suffer disproportionately from any fall in price, as we're learning now.