Nice updated depiction of the classic Case Shiller chart, by regular TBP reader Steve Barry. We are now at 158, and SB sees the mean reversion going on until 2015 or so. (ouch)

c

hat tip Steve Barry.

Original graphic via NYT

Category: Credit, Data Analysis, Digital Media, Real Estate, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

47 Responses to “Classic Case Shiller Housing Price Chart, Updated”

  1. Steve Barry says:

    You can clearly see we are at 2004 levels and where we need to get, according to Shiller’s data. I don’t even want to consider a dramatic overshoot…that will be cataclysmic.

  2. dead hobo says:

    There you go again.

    1) You can’t use inflation adjusted figures as gospel and then claim the cpi is a fraudulent measure of inflation. If the cpi is wrong, then you would expect home prices to skew upwards in later years.

    2) McMansions are a fairly new thing. Therefore, in many cases you are comparing base homes of today to lesser quality homes of a couple decades ago and cracker boxes of the 1950 – 1970 era. Please adjust for conspicuous consumption and resubmit.

    3) Life outside of Crazytown looks nothing like the right side of the chart. Most people don’t live in Crazytown.

    4) If you want credibility, convert the CS to something that reflects realistic stratification.

  3. dead hobo says:

    5) Lowered interest rates boost the ability to purchase. This also skews up the price of the home in later years since interest rates for homes are the lowest in history. I can clearly remember when people didn’t whine about 7% mortgage rates.

  4. Steve Barry says:

    @dead hobo:

    Point 1… You are right that the inflation adjusting methodology is important to the outcome. There is some trust that Shiller did this correctly, but that applies to any inflation adjusted chart.

    Points 2-4 are immaterial. McMansions are the very thing that helped get this out of control. This should not be adjusted for that, the ramifications are a result of that fact. We know this is a composite average and some areas must vary. The scale looks fine to me…where is it off?

    As for point 5, I project the index to bottom near previous 100 year highs…that will take into account rates on the low end of history.

  5. msaroff says:

    I think that the bottom is further off than 2015, because we will see significant OVERSHOOT.

  6. Steve Barry says:

    And we may need to adjust the right side down for de-flation soon.

  7. Transor Z says:

    I’m just an unfrozen caveman lawyer. Your strange ways and magic tools frighten and confuse me.

    But it seems to me that the big pointy thing on the right is about four or five times bigger and pointier than any of the other pointy things on there.

    That makes me afraid of it and not at all confident that historical data means squat.

  8. Steve Barry says:

    The debate comes down to this…if you trust Shiller’s chart, my conclusion looks unavoidable…if you can come up with a different chart, your conclusion will vary. Shiller has been pretty right about things.

  9. Boomer says:

    “2) McMansions are a fairly new thing. Therefore, in many cases you are comparing base homes of today to lesser quality homes of a couple decades ago and cracker boxes of the 1950 – 1970 era. Please adjust for conspicuous consumption and resubmit.”

    These are same sales indexes. Comparing the same house that was purchased a year or years ago to the same house that was sold today. So you aren’t comparing lesser quality homes with modern homes.

    The skew you can get is from a qualatative difference in the home due to modernization. But it isn’t yet known when the smoke clears that people can actually afford to pay more for a home just because they threw some money at it during the boom. I have yet to see a compelling case as to why people can afford to pay so much more for homes now relative to any other time in history.

  10. dead hobo says:

    Steve Barry Says:
    December 30th, 2008 at 2:18 pm

    Points 2-4 are immaterial. McMansions are the very thing that helped get this out of control. This should not be adjusted for that, the ramifications are a result of that fact. We know this is a composite average and some areas must vary. The scale looks fine to me…where is it off?

    reply:
    —————
    Then you obviously don’t understand the very chart you submitted. This is a chart of ‘standard priced homes’. Since houses, on average, have become larger and more elaborate over the years, they should naturally cost more. If you are comparing a standard post WW2 house in Levittown, Pennsylvania to a circa 2002 3000 foot California suburban, then there is a tad of difference to account for. Thus, please define ‘the standard house’ and how it might have changed … or not.

    Re CS adjustment for inflation using some special system or magic calculation … I doubt it. They probably use median or average price, deflated by the cpi or some magic part of it.

    Also, low interest rates mean people can afford more house on a given income. This also skews up prices. It EXPLAINS part of the bulge as normal.

  11. Steve Barry says:

    @ Boomer: “I have yet to see a compelling case as to why people can afford to pay so much more for homes now relative to any other time in history.”

    That’s exactly the point…rates have been this low before (I re-financed at 4 5/8 in 2003 for example)…people could have built McManisons before…but over 100 years, they never did. Dead hobo is also welcome to argue that we can throw out 100 years of data…that this time is different…but we know how that turns out.

  12. karen says:

    Transor Z, you get a standing ovation from me. : )

  13. Boomer says:

    “Then you obviously don’t understand the very chart you submitted.”

    Kind of funny considering you clearly don’t understand the chart and you are critiquing him.

    Here is the methodology for the Case/Shiller index:
    http://www2.standardandpoors.com/spf/pdf/index/SPCS_MetroArea_HomePrices_Methodology.pdf

  14. Steve Barry says:

    @DH:

    the point is that homes became more large and elaborate due to the bubble, and were outside people’s ability to afford them, as you could have easily concluded, because at no other time in our history did home values come anywhere near July 2006. BTW these larger homes also have larger energy, insurance, taxes and upkeep costs relative to smaller homes, making them that much more unaffordable.

  15. dead hobo says:

    Boomer Says:
    December 30th, 2008 at 2:56 pm

    Here is the methodology for the Case/Shiller index:

    reply:

    Read it. Apparently they only include used single family houses that have been sold at least two times (plus more qualifications). Thus, my point is accurate.

    Since houses are becoming larger and more elaborate over time, the average price will skew upwards, even without taking the cpi into consideration.

    Steve Barry, please keep your nanny economics away from my pocketbook and personal life. I’ll buy what I damn well please without first asking for your permission.

  16. Transor Z says:

    @ Karen: thank you, thank you. :-)

    @SB: If you don’t get off your ass no one can kick it, so kudos for subjecting your theory to this crowd.

    ———-
    Unfortunately, most recent stats I could find are from the 2000 census, but the vacant housing unit stats do show an average vacancy rate of about 16% for housing stock from 11 to 40 years old, more than double that of more recent <10 yrs construction (~6%).

    http://factfinder.census.gov/servlet/QTTable?_bm=y&-geo_id=01000US&-qr_name=DEC_2000_SF3_U_QTH5&-ds_name=DEC_2000_SF3_U

    If the last decade followed suit, we’ll expect to see a strong preference for new construction.

  17. Boomer says:

    “Since houses are becoming larger and more elaborate over time, the average price will skew upwards, even without taking the cpi into consideration. ”

    If you read it and that is what you got from it you need to read it again.

    Again it is same sales comparison. Same home compared to the same home. And its an index so a small home going up 10% and a big home going up 10% have the same effect on the index. The small home isnt being compared to the big home. And the big home first recorded sale sets its initial price and the future values are compared to that initial value.

    You really should take some time to read and learn all 30 pages of the methodology. It is pretty solid and you are giving it way less credit and understanding than it deserves.

  18. Steve Barry says:

    @Transor:

    It’s not my theory, it is Shiller’s…this chart was originally printed in his book and in the NYT in 2006. His reputation in spotting bubbles and chronicling housing indices is such that I felt his chart should be updated with his last 3 years of data. The dotted line part is my interpretation, which some obviously disagree with and some don’t want to acknowledge its possibility.

  19. DL says:

    Regarding the time element of price decline:

    There was a graph published on this site a month or two ago showing real estate prices in various countries, one of which was Japan. The peak in real estate prices occurred in 1989; while the bulk of the decline is probably over, the decline in prices has still not fully run its course even 19 years later.

    The point is that in inflation-adjusted terms, the decline can take a LONG time.

  20. dead hobo says:

    boomer, you’re right about ‘same house’ comparisons. My mistake. However, the statistical adjustments they refer to and use if turnover time is not just right, plus the fact they ignore new construction, makes me even less sure of this study.

    Also, this appears to have nothing to do with ‘the standard house’ concept in the graph above.

  21. DL says:

    I fished out the graph (real estate/prices/Japan):

    http://www.ritholtz.com/blog/2008/11/global-real-estate-ratios/

  22. Boomer says:

    Again, just to be clear:
    “Sales pairs are designed to yield the price change for the same house, while holding the quality and size of each house constant.”

    So remove it from your brain and move on. It also doesn’t explain how people can afford more (in real terms) for the same home relative to anytime in history. Interest rates only bring you so far and are easily accounted for as are the negative affordability effects of things like property taxes.

    The simple, rational explanation is it was a credit bubble, the largest in history, and it affected the housing market to a great degree because it created massive competition in a short time frame (short time frame relative to the ability for the housing market to respond). All demand was able to be effective (backed up by purchasing power) because the lenders were giving money away. We now are seeing just where exactly the bottom might lie based on income and affordability, it won’t be a huge shock to bottom a bit below 110 on the graph. Much demand was pulled forward and is now future demand is being essentially destroyed for a period of time (foreclosure), so we have increased supply and less demand. We also haven’t accounted for the other parts of the credit bubble (massive credit card, car loan and studen loan debt) and it’s affect on affordability.

    People really make this all way more complicated than it should be because it is a “home” and because they are concentrating on the home aspect they miss the whole largest credit bubble in human history aspect. Once you see the credit bubble and it bursting everything follows logically from that.

  23. Boomer says:

    “However, the statistical adjustments they refer to and use if turnover time is not just right, plus the fact they ignore new construction, makes me even less sure of this study.”

    So you are shown to be wrong so let’s say the data is suspect. Solid.

    It “excludes” new construction because new construction hasn’t sold twice. Once a new house has sold and then that owner sells it, it can then be included in the index. Again, repeat sales to control for quality and size as much as possible.

    “Also, this appears to have nothing to do with ‘the standard house’ concept in the graph above.”

    The “standard existing houses” is a house who had an arms length transaction sale and then resold again.

    Maybe try this brain excercise. Assume the chart is correct (not Steve Barrys dotted line addition which is his prediction), what is it then telling you.

  24. leftback says:

    @ DL:

    Thanks for the Japanese RE graph. Scary, but bear in mind the demographic factors in play are unusual. A rapidly greying population and close to zero immigration make demand for Japanese RE far weaker than in the USA.

    @ Transor Z:

    The big pointy thing was awesome.

  25. Moss says:

    The capital gains tax exclusion on home sales will buffer the downward trend as will whatever new tax incentives Obama put’s into the stimulus package. All things are not equal so I believe a premium, even if legislated, will remain. The other factor which is not accounted for is the excess supply which we have today.

  26. cbosco76 says:

    There is a lecture by Richard Koo (chief economist of Nomura Research Institute) discussing the lessons that can be learned by Japan’s lost decade. Of course, you can take what he says with a grain of salt. On page 1 of the lecture notes (http://www.csis.org/media/csis/events/081029_japan_koo.pdf) is a overlay of the current US housing bubble to Japan’s bubble of the 80′s/90′s.

    The lecture/notes can be found here:
    http://www.csis.org/component/option,com_csis_events/task,view/id,1828/

    PS – I have become an avid reader of this blog due in part to the many excellent insights and perspectives of the comments. Thanks, everyone!

  27. dead hobo says:

    Boomer,

    First, calm down.

    Next, used homes and new homes don’t exist in different universes. Nor are they purchased by different people who never meet. Used homes compete with new homes, thus they share similar pricing characteristics. Ask any appraiser who isn’t crooked. If used homes fall in price then similar new homes will cost less and vice versa. This also helps explain the shock value of the study. People ‘get it’ without needing to read the fine print.

    Therefore, CS may have a methodology you admire, but it is still a basic price study. And new homes should bear a simple relationship in price and predictability without going through a lot gymnastics. Even a little intuitive common sense will still apply. Sorry, it’s true.

    Therefore, I refuse to get confused by individual trees and ignore the entire forest as a result.

    Facts:

    Houses have gotten bigger and more elaborate over time so they should naturally get more expensive over time.

    Lowered interest rates allow consumers to afford a higher payment so this means more expensive homes can be purchased. Since home ownership is a form of savings, this is a good thing if people buy larger homes since they will build equity and leveraged profits (unless they are stupid and piss it away on home equity loans)

    This too shall pass and financial markets will eventually start going up, along with home values.

    Boomer, it’s not religion. It’s economics. I would understand your discombobulation if we were arguing about the best way to get to heaven (note: it’s not ‘heaven’ in the way you think. It’s really just a snot nosed kid running a Sims game about 1000 years into the future. Sorry … that’s God and you’re probably just one of his drooling buddies wearing a set of ear plugs.)

  28. Steve Barry says:

    What is it about human nature that dictates houses should get bigger and more elaborate over time? I’d say NOTHING…it is a temporary phenomenon, courtesy of a Federal Reserve that induced massive moral hazard to encourage a debt binge.

  29. Forty2 says:

    So McMansions are somewhat of a recent thing, ca. 1996 or so, but ask whether one built in, say, 2005 in a frenzy of flingin’ em up with crap materials and indifferent labor, will still be standing in 40 years.

    Oh, and there are nearly-new houses in high-humidity areas e.g. Florida that, having been vacated/foreclosed and left with no AC running, will need to be demolished or completely stripped and rebuilt due to mold. Same for new, unsold ones.

  30. dead hobo says:

    Steve Barry Says:
    December 30th, 2008 at 4:51 pm

    What is it about human nature that dictates houses should get bigger and more elaborate over time? I’d say NOTHING…it is a temporary phenomenon, courtesy of a Federal Reserve that induced massive moral hazard to encourage a debt binge.

    reply:

    No. It’s people spending their own money on what they damn well please.

    If someone wants to go 40:1 leverage using OPM and 2nd or 3rd hand debt instruments then they should be in jail with cellmates who have insatiable urges and the cellmates should have friends with bad temperament and stronger urges.

    If someone wants to spend their own money in their own way, piss off.

  31. Steve Barry says:

    Forty2:

    Where I live , they slap them up right on top of eachother, with less than a quarter acre each.

  32. Steve Barry says:

    @DH,

    You’re on to my scheme…I want everybody to spend money as I dictate…I want to rule the world.

  33. dead hobo says:

    Steve Barry Says:
    December 30th, 2008 at 5:07 pm

    @DH,

    You’re on to my scheme…I want everybody to spend money as I dictate…I want to rule the world.

    reply:
    —————
    Thanks for clearing that up. Hope I didn’t foil your plan too severely.

  34. kfunck1 says:

    Can someone tell me what happened in 1997?

  35. Boomer says:

    “Next, used homes and new homes don’t exist in different universes.”

    Nobody said they did, you were questioning the methodologies usefuleness since it excluded new home sale. But you can’t hold new home sales constant for size and quality until they are re-sold. It is after they are re-sold do they get included in the index.

    “Houses have gotten bigger and more elaborate over time so they should naturally get more expensive over time.”

    Well this of course ignores increased effeciencies in construction but lets say this is true, houses only get bigger and more expensive over time. It A) wouldn’t make a darn bit of difference to the Index if you read the methodology and B) can only be explained how people “afford” them by overleveraing themselves since wages and interest rates are easily accounted for.

    “Lowered interest rates allow consumers to afford a higher payment so this means more expensive homes can be purchased.”

    Umm, no. You can still only afford the same payment, but it does allow you a somewhat higher home price relative to income. There are negative affordability issues with higher prices as well, all of these can easily be accounted for. If you look at rents versus mortgage payments during the boom there is a huge disparity even when adjusting for quality. This disparity can only be explained by the fact that people again overleveraged themselves. They borrowed more than anytime before in history.

    “Since home ownership is a form of savings, this is a good thing if people buy larger homes since they will build equity and leveraged profits ”

    Savings, If home prices go up. Equity is only built in 2 ways, price appreciation or barring that paying down the debt faster than the house is depreciating.

    We just had the largest boom in RE prices in HISTORY and you would think owners equity of housing stock went up… But it didn’t! It went down and is the lowest point in history. Mortgage debt as a percentage of GDP is also the highest in history.

    Here is a subset of historical data:
    http://www.prudentbear.com/index.php/mortgage-debt-vs-equity

    If you bother to look at the originations of the last few years you would notice the number of loans that lack amortization (IO or POA). I’ve only looked Loan Performance data which doesn’t going back to the beginning of the mortgage market but based on modern securitization and the size of the pools it is safe to say that the number of these loans in the marketplace has never been higher. Without amortization people aren’t paying off their debt so we have high debt and falling prices. Hard to see the “savings” angle relative to the market right now. Some are paying down their loans and some markets are appreciating but in aggregate things have gotten worse not better.

    It will all eventually pass, on that we agree. But it is the magnitude everyone is arguing about, the numbers are much more compelling for a significant downward price correction than stabilization.

    “Boomer, it’s not religion. It’s economics. I would understand your discombobulation if we were arguing about the best way to get to heaven ”

    What discombobulation, I was merely pointing out the many factual errors in your statements, I even provided links to back me up on things like the methodology and mortgage debt and equity so you wouldn’t have to take my word for it but could choose to investigate the information for yourself and become more informed. It is clear you have a theory and you are trying to back in some facts to fill in the theory. But it really isn’t working out very well for you. Have the facts form your theories not the other way around.

    “(note: it’s not ‘heaven’ in the way you think. It’s really just a snot nosed kid running a Sims game about 1000 years into the future. Sorry … that’s God and you’re probably just one of his drooling buddies wearing a set of ear plugs.)”

    Umm, yeah, I really hope wherever this came from (near as I can tell nobody has said a thing about God or religion but you) but I hope you can get some solid therapist time to work through your whole god issue.

  36. Boomer says:

    “Can someone tell me what happened in 1997?”

    Start of a drop in lending standards. It was more that banks were seeing how profitable it was to lend to people with bad credit. Initially it was done pretty safely (higher down, better underwriting). But then you throw in securitization into the mix and it is gasoline on a flame. Once you are lending other peoples money it is a hop-skip and a jump away from realizing that strict underwriting means you are throwing away good money. It was a race to the bottom in underwriting and it took about 10 years to get there.

  37. kfunck1 says:

    The graph just looks different than the other ones I’ve seen (including CS), which usually show the precipitous climb starting in 03, not 97.

  38. gregh says:

    DeadHobo wrote ““Houses have gotten bigger and more elaborate over time so they should naturally get more expensive over time.””

    Every decade since 1890 has seen larger and more elaborate homes, so the above fact ‘should’ lend to an overall uptrend across all decades, yet we see the mean reversion. Could sheer volume of homes created skew this? (what if an extreme quantity of homes were added to the market and they all were on the extreme edge in size/elaborate) We’re comparing same home sales, but the new monsters could drive up sales for existing homes?

  39. Ken says:

    Forty2 wrote: “So McMansions are somewhat of a recent thing, ca. 1996 or so, but ask whether one built in, say, 2005 in a frenzy of flingin’ em up with crap materials and indifferent labor, will still be standing in 40 years.”

    There’s a similar discussion underway over at Calculated Risk. They were speculating whether the McMansions have a future as multi-family dwellings. Several people have brought up the analogous situation with the large Victorians built in the 1800s, and converted after the various Panics and the Great Depression. There seems to be a consensus that the modern floorplans and construction are not amenable to subdividing the houses.

  40. Boomer says:

    @kfunck1

    Be careful of the scale on the bottom. The rise did start in 1997 but it is easier to see in the above graph since the data points are closer together. Most Case/Shiller charts you see show the data back to 1987. Since the data points are further apart it makes the slopes smaller.

    @gregh

    Again, it is repeat sales. So if a bunch of million dollar 5,000 sq ft homes came on the market new, and they all sold 2 years later for 1.1 million. The index would just show a 10% improvement for those homes. The size and quality doesn’t matter to the index.

    But even if it did the theory still breaks down on how people can afford them as they do get bigger and better. Everyone wants bigger and better but only a few can afford it. Except during the boom where anyone could afford anything as long as they were willing to leverage themselves to do it. Desire has to be backed up by purchasing power to be considered demand. Demand was increased during the boom (not just for houses, but for anything, cars, luxury goods, college) because anyone that wanted purchasing power, regardless of income, could have it. That is in the process of being taken away and we are coming back to being able to prove you can afford something in order to get the money for it.

  41. Ken says:

    Steve Barry wrote: “What is it about human nature that dictates houses should get bigger and more elaborate over time?”

    I agree with you, that this is not a valid trend. What arguably has happened is that, as the sheer quantity of housing stock grew with the population, the “tail” of the distribution has gone further out and gotten fatter – the same sort of phenomenon seen in similar situations, most notably biological (Stephen Jay Gould had some interesting columns about this).

    Despite this increase of the tail, however, the distribution of the housing stock for many years conformed fairly closely with the income curve, because the banks had standards for their loans based on debt-to-income ratios and so forth. One result of this is that the house builders kept turning out the smaller “starter” homes, even though they had a larger margin for more elaborate construction – but there weren’t enough buyers for such houses.

    Then the banks went crazy in the late 90s. Personally, I blame the securitization process; it meant that the bank could sell the loan, getting it off its own books and recording an immediate profit. There was no incentive at all to ensure the loan would, or could, be paid back, and loaning $700,000 to someone with a yearly income of $28,000 was perfectly reasonable – it generated larger immediate fees, with no long-term downside. That change in lending standards removed the debt/income ceiling on the loans, and everything else followed. In particular, the builders started producing the higher-priced, higher-margin properties, since more people could “afford” them.

    Now, of course, the banks have (re)discovered the ancient principles of lending, and their (re)introduction has yanked the rug out from under house prices. I expect they will fall to historic multiples of median income (hopefully with minimal overshoot), and – as the chart shows – hover there for a decade or two, until the current lessons are forgotten.

  42. Big E says:

    Something else to consider – a lot of these 2004-2007 McMansions who’s owners have stopped paying rent recently haven’t been put back onto the market yet with an arm’s length transaction to be considered for the index, not to mention the upcoming foreclosures in the alt-a/option arm market.

    I think we’re going to get another round of “hoocoodanode?”, which is pretty much been the catchphrase of this decade..

  43. Steve Barry says:

    We haven’t talked much about condos…the Ritz Carlton in White Plains built 2 towers with million dollar apartments (some up to $15 Million). The first tower sold out, but the second has offers on only 70 out of 160 and some who bought were flippers who want to back out now…others bid based on being able to sell their house and now can’t. Those $15 Million condos certainly drove up prices.

  44. Boomer says:

    Condos aren’t included in the Case/Shiller index like the chart above. They have just recently started a separate index for condos that covers five markets:
    http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,6,0,0,0,0,0.html

    Still the same stuff, prices bubbled.

  45. Steve Barry says:

    Boomer:

    Never saw the condo index before…thanks…seems to me that the chart above would look even worse if they could reflect condo mania as well. The house and condo markets must have some relationship…people often sell a house to buy a condo or vice versa.

  46. gloppie says:

    ya’ll are boring tonight.

    | /dev/null