Visualizing Economics looks at what happens to the classic Case Shiller housing graph when you adjust for size, quality, etc.
My longstanding view has been that the bubble was in credit, and the credit bubble caused the overall housing boom and bust, as well as select regional bubbles.
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Source: Visualizing Economics
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
"Money is power, & you ought to be reasonably ambitious to have it." —Russell H. Conwell, Temple Univ, 1877
"It's the end of the world as we know it and I feel fine" say the French as consumer confidence in May rose to the highest since Nov '10 as they welcome and get excited about new Pres Hollande. Also, the French 10 yr bond yield touched the lowest on record this morning. June consumer confidence in Germany held at 5.7, just .2 pts off the highest since Mar '11. To the euro bond debate which is now taking on greater rhetoric with those with high bond yields wanting them and those with low ones saying no way, ECB member...
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March 31st, 2011 at 9:41 am
I’ll bite :-)’ umm indoor baths
http://en.wikipedia.org/wiki/Roman_aqueduct
March 31st, 2011 at 9:50 am
This supports the proposition that housing (at this time) is already fairly valued, at least if all other variables were fixed. I accept that qualified proposition. But, some variables changed.
Since the internet supported offshoring like never before, I expected private sector job markets to be destroyed. During the 2000′s, the twin “temporary” stimuli of US invasions/occupations and the Credit Bubble both overpowered the Giant Sucking Sound. Without them, what happens to incomes? And with decreasing incomes, who will step up to become the new home buyers — without which house prices go down rather than up?
Well, if nothing else, the housing industry will probably build smaller homes, to fit downsized budgets. Maybe in years to come that trend will manifest itself as “after 2010, the orange line sloped down at a gradual pace”.
March 31st, 2011 at 9:56 am
This is what I wanted to see when I commented a couple of days ago regarding the inflation adjusted cost of housing. I was not aware Case/Schiller went back to 1940 with their charts.
It’s not surprising that square footage per occupant is about 3-times what it was in 1940.
One thing nobody is talking about is Peak Median Square Footage. I think we reached that at the peak of the housing bubble. Lower real incomes and higher energy costs are shrinking the size of what little new construction there is.
March 31st, 2011 at 10:04 am
Drive along some highways out west that travel through suburbs those same highways created, and you’ll see the most obvious manifestation of this. Massive 4-6000 sq. foot homes sitting right next to each other in Denver, SLC, Dallas, and beyond. No wonder they have water shortages out there with so many seven bathroom monstrosities. With pools.
March 31st, 2011 at 10:10 am
I don’t think the graphic is very meaningful. The graphic seems to be based on a confusion of use value and exchange value of a good and on the assumption that the exchange value of a unit of a good with unchanging quality just stays the same over time, which is not the case. Instead, in capitalist economy, the exchange value tends to decrease over the the long term with improving technology, which enables the producers to produce the same number of units of the same quality in less and less time, decreasing the exchange value of a unit of the same quality. The evidence for this to be true for housing units is actually to be found in the Shiller-Case home price index, as approximation for the exchange value for a housing unit with improving quality. So, the quality factor has already been factored in the Shiller-Case index. Adjusting again to get the second graph with the ominous “real value” means that the “quality” of a housing unit has been factored in twice. Double counting.
March 31st, 2011 at 10:17 am
Interesting chart, but it misses the real forcing function and that is access to cheap energy. Drive until you can buy.
Furthermore, in terms of quality of materials, I will take a house built in 50′s over anything that has been built in the last 30 years.
March 31st, 2011 at 10:33 am
Great post…..! I quote….
“Everyone,” Kempf comments, “knows that China will never be able to reach a level of consumption per inhabitant comparable to that of the Americans, with two cars per family, three televisions, four computers and cell phones, a house three times too big for its inhabitants, which generates energy consumption that would be sufficient to the needs of ten, even twenty people on other continents.”
http://www.truth-out.org/article/louis-gilles-francoeur-the-rich-stand-accused
The Rich Stand Accused
By Louis-Gilles Francoeur
Le Devoir
Saturday 06 January and Sunday 07 January 2007
It was and remains an unsustainable inevitability…. It’s a good essay, you should read it…
Best regards,
Econolicious
March 31st, 2011 at 10:36 am
Maybe we need a chart of median price to median annual household income.
March 31st, 2011 at 10:38 am
As I read this, Its the Shiller graph that adjusts for quality, size, etc., while the other line is the “real” price, that does not adjust for those factors?
March 31st, 2011 at 11:09 am
Oh, oh. I should have double checked first by reading the methodology of the Case/Shiller index again before I started to criticize. I have to retract what I said before, at least partially. The index actually tries to adjust for changes in the quality, at least for the single units of a sales pair, by adjusting for price anomalies compared to the statistics of the local market where the house is traded. Whether the applied weighting also can capture long-term improvements of the quality in the overall housing stock in this way, I don’t know, since such a trend wouldn’t appear as price anomaly compared to the overall trend. I see this an open question for now.
March 31st, 2011 at 11:38 am
Every weekend I drive around my town witht he kids going to soccer games and lacrosse practice. Every week we find new homes for sale. I don’t mind seeing the homes for sale, I just wish some of the homes already on the market would actually SELL. It is not a good thing, when you look up a block and see more front lawn 4-sale signs than cars parked on the block.
Home town . Nassau/Suffolk border on Long Island (name withheld)
March 31st, 2011 at 11:43 am
So, does the top chart imply that house prices can sink even further than Case-Shiller implies as people opt for smaller houses and the number of people in households increases because kids can’t afford to live independently?
If we go back to 1980 valuations on the top chart, we are a little over 25% over valued; 1970 (with no Freddie Mac as appears to be in the card) would mean 50% overvalued.
March 31st, 2011 at 11:47 am
I’m not sure “quality” can be quantified. Is a 5000 square foot mass produced megamansion on a 1/4 acre lot in a crowded neighborhood really more “quality” than than a simple home with privacy and nice views?
March 31st, 2011 at 12:22 pm
What am I missing? If you adjust for the average size of building, then shouldn’t the graph go down as building size goes up? Same with building technology.
If you are adjusting for inflation AND building technology AND building size, then isn’t the top graph just showing the increased profits of home-builders?
March 31st, 2011 at 12:29 pm
And energy efficient? That’s the big one these days.
March 31st, 2011 at 12:38 pm
The 1930′s seem to be the peak in housing quality.
Better foundations, materials and framing.
The home builders are selling square feet and houses that can get blown down in a strong wind.
March 31st, 2011 at 2:06 pm
The real quality issue during a buble and subsequent crash is pretty hard to measure. During the mania you could sell anything; as is; no warranty, get in line and start bidding. On the way down the inventory of homes for sale balloons and the buyers cherry pick the homes that actually get sold. Sellers usually have to spend thousands on upgrades and repairs if they want their house to be one of the ones sold.
The market price is set by the homes that actually get sold. Belive me, there was a huge difference in the quality of the homes that established the line on the graph on the way up from the ones that established the line on the way down. The graph understates the magnitude of the bubble; but I have no idea how you could measure that.
March 31st, 2011 at 3:27 pm
http://finance.yahoo.com/blogs/daily-ticker/housing-dead-bubble-still-bursting-abroad-says-harry-20110331-092812-715.html?sec=topStories&pos=4&asset=&ccode=
harry dent says baby boomers will never buy housing again. barry, is this a contrarian indicator? does this mean the housing correction is over?
March 31st, 2011 at 4:35 pm
The tool shed called, Harry Dent is missing. Dow 40,000…I mean 18,000…I really mean 15,000…Tool
March 31st, 2011 at 5:12 pm
It is true that America’s largest generation, and most spendy, I might add, are now downsizing their homes and smartening up about their big purchases. Well, except for autos, which the boomers seem to maintain an everlasting hard-on for. I see boomers driving around in 40-50k dollar cars, brand new, all the time. Downsizing homes maybe, but the love affair with the automobile, a depreciating piece of machinary, never dies.