Following the record low data in New Home Sales yesterday, we looked at a 50 year chart of that plumbed the depths of that data series. Today, I want to expand upon that and look at a 120 year chart of real vs. nominal home prices, via Visualizing Economics.

There are a few noteworthy items on the chart: The Great Depression saw Housing prices collapse, but in real terms the price of housing had been slowing for a while (for many reasons).

The GI Bill, post WW2 boom, the widespread ownership of automobiles saw the growth of the suburbs and a major housing boom. In nominal terms housing prices began to rise above trend levels in the 1980s, and then in the late 1990s  saw some additional price gains as profits rotated from equities to residential RE.

In both real and nominal terms, the 2000s saw home prices go ballistic.

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click for ginormous chart

Category: Inflation, Real Estate

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22 Responses to “Comparing Housing Prices, Real vs Nominal (1890-2011)”

  1. Outta Here says:

    Nice chart. With a boom like we’ve just gone through, there’s bound to be some overshoot the downside of the trendline.

  2. Ruschem says:

    We may be closer to long-term trend line than we think, especially in new homes. Builders inflate prices by giving rebates. Builder forced us to pay base price on closing but we will get a rebate check at closing. Our actual price is way below the official purchase price. Builder says when they do that, they protect interests of all homeowner in the subdivision. Also, they pay all closing costs including all pre-paids. Some new houses are excellent deals now if you need a place to leave. They are cheaper than comparable rents if you can afford down payment.

  3. BennyProfane says:

    Would love to see an overlay of population bulges during those time periods. Specifically, the elephant in the room here are the Boomers dying off over the next twenty to thirty years, and leaving their laddered up MacMansions to the next generations to sort things out.

  4. You can draw conclusions from the average of the U.S., but at your peril. For example, bringing down the average in the 1990s was the Texas housing crash, in the 1980s the farm-state crash, and the late 1990s northeast real estate price surge is not apparent…..

    The U.S. is so large, that economics of local areas really drives pricing and very large divergences occur in pricing, although there are at times parallel price movements (ie, 2008).

    Now though, pricing is improving in farm states where business is good and not improving nearly as much in old industrial areas (ie, Detroit).

  5. Lyle says:

    Do we know the ration of construction to land costs over this period. I wonder if the fall post WWI is due to the automobile coming online in a big way and thereby increasing the effective supply of land for housing.

  6. ByteMe says:

    If you take out 2000-2010, does the trend line shift south? Also, does the below-trend-line period leading up to the boom indicate that the boom was to offset being below trend line for so long?

    My Magic Eight Ball says “Help, let me out of this stupid ball!”

  7. [...] –Home Prices: Barry Ritholtz riffs on a great chart from Visualizing Economics that compares long-term house prices in both nominal and inflation-adjusted terms. “There are a few noteworthy items on the chart: The Great Depression saw Housing prices collapse, but in real terms the price of housing had been slowing for a while (for many reasons). The GI Bill, post WW2 boom, the widespread ownership of automobiles saw the growth of the suburbs and a major housing boom. In nominal terms housing prices began to rise above trend levels in the 1980s, and then in the late 1990s saw some additional price gains as profits rotated from equities to residential RE. In both real and nominal terms, the 2000s saw home prices go ballastic.” [...]

  8. BennyProfane says:

    @Alaric Investments

    This one is pretty much nationwide. It’s not just Detroit, it’s Florida, Arizona, Nevada, California, the crumbling industrial midwest, Seattle, and pretty much anywhere that bankers and politicians don’t work, which means NYC and DC, and NYC metro is slowly sinking into the mud as we speak, too.

  9. BennyProfane – yes, the 2008 housing crisis hit all areas of the U.S. – however, the recovery has definitely not be uniform at all.

    Farm states are recovering faster, thanks to high grain prices and fairly good state fiscal environments.

    Old, industrial areas are not recovering nearly as fast, and fiscal environments in these areas are also very strained.

    Washington DC is actually recovering quite well – with the creation of so many high paying government jobs has been a real driver of solid growth.

    New York has stabilized, but any hit to bank profits or a stock market crash will impact the area inordinately as it always has.

    Recovery will be and is local.

  10. BennyProfane says:

    @Alaric Investments

    What recovery? Farmland? c’mon. And, DC doesn’t count. That’s an embarrassment to us all, right behind NYC.

    BTW, “old industrial areas” aren’t recovering so fast because they never saw the run up. They lost momentum around 1975.

  11. Ruschem: I agree with this point. If you were to use the net effective price of new construction, we may be right on the 120 year trend line. Notwithstanding, as we all have realized, the housing market is more like the stock market than a rational statistical model. It’s emotional and driven by fear and greed: not just by homeowners, but also by the bankers who loan them money.

    I take my cues from those bankers now-a-days and looking at the increasing availability of higher LTV loan products in the marketplace, I suspect we will have a “dead cat bounce” effect off the 120 year trend line.

  12. Anthony Saccamora says:

    @Alaric sure individual recoveries are different but if you look at 20 city case shiller index the falls are roughly proportional to the magnitude of pop before the bubble popped. There are other factors such as availability of land, jobs etc that might skew prices as well. Individual discrepancies are in the noise though given that the bubble was caused by a credit bubble that’s hardly surprising.

    @Benny data on population and housing costs can bs found at Dr. Shillers website. http://www.econ.yale.edu/~shiller/data/Fig2-1.xls

  13. moonmullins says:

    Nasty looking real returns.

    Translation, “Uh, James Altucher, you weren’t so wrong after all” … Best wishes, your pal, Barry.

  14. socaljoe says:

    Another chart of the CPI, the calculation of which has been repeatably tortured into political submission over the years… the errors of which are then compounded over a hundred years… rendering the result meaningless.

  15. Lord says:

    The 1918 pandemic also cut demand for housing. Certainly the car expanded the range of cities limiting price increases, but greater congestion and higher gas prices have limited this for large cities in recent decades which is why growth areas do out pace inflation. While the population is stabilizing there is still much growth ahead although it will be among the retired.

  16. Paul B says:

    The source of the graph was Shiller, who uses CPI to deflate the change in home values to arrive at “real” home price increases/decreases. CPI does not include the increase in systemic credit. Credit is a claim on a dollar. Dollars must exist to repay the claim. Currently there are 26 times more claims on dollars than dollars in existence (~$70 trillion vs. $2.7 trillion after QE2). This means that many, many dollars will have to be produced merely to satisfy claims.

    More dollars in existence dilutes the purchasing power of each one, the same way more shares dilutes the value of each one. (inflation is always and everywhere a monetary phenomenon.) Thus, a more accurate measure of “real” home price increases/decreases would be to deflate nominal by credit production.

    So I disagree that home prices rose in real terms in the 2000s, and I’d further argue that current home price weakness is a natural function of homes seeking their real value (the supply/demand for homes adjusted for necessary current and future inflation, which is to say money production).

  17. nofoulsontheplayground says:

    It would be nice if we could see a chart showing inflation adjusted housing price per square foot, corrected for population density. That would give a better look at the price of housing over the years.

    If you added in hedonic inflation adjustments, which were not present in the vast majority of that chart, we’d see that things like improved appliances, materials, construction productivity, and amenities (electricity, climate control, indoor plumbing, etc) made housing trend far below the rate of inflation prior to the government getting involved in the housing market.

  18. tagyoureit says:

    1981, buy a house for $75,000 at 15% fixed (pretend you didn’t refi), sell it in 2011 for $341,399. Also, you need to make 41k/year (Median Household Income, two earners: $29,791; 73% funded)

    2011, buy a house for $341,399 (don’t laugh!) at 4.25% fixed and pay it off over the whole 30 years. 2041 sell it for $604.613.61. Also, you need to make $72k/year (Median Household $50,151; 69% funded)

    2041 buy it for $604.613.61 at 9% fixed, sell in 2071. Also, you need to make $208k/year.

  19. BennyProfane says:

    @tagyoureit

    “2011, buy a house for $341,399 (don’t laugh!) at 4.25% fixed and pay it off over the whole 30 years. 2041 sell it for $604.613.61.”

    That’s optimistic. It’s been twenty years since the Japan residential market crashed, and pretty much stuck in the mud since then.

  20. gloppie says:

    Any value that requires a log chart to be visible and is not indicative of a power factor (Decibels, Watts etc..) is a Ponzi.

    Or is it a power factor after all?

  21. Andy T says:

    Glad the chart notes the creation of Fannie and Freddie Mac at important inflection points. Though, we “know” Fannie and Freddie had nothing to do with the secular bull market in RRE. Right?

  22. Realtor A says:

    NY has “stabilized”?

    You must be one of my lying colleagues as so many of them are.

    NY and all of the northeast is barely in the third inning of fallout from The Great Housing Fraud.