Friday, September 01, 2006

A history of home values

Economist Robert J. Shiller has constructed an existing home price-index going back to 1890.

The graph, entitled, "A History of Home Values", is inflation-adjusted and is benchmarked to a starting figure of 100 in the first year. Thanks to for reproducing this chart.

Here's an interesting exercise: look at the chart and see what you notice about the price movements over time. What I see from looking at this chart is that, while the 1970s and '80s booms were noticeable enough and took the index from near identical trough points (down around 105) to similar peaks (up into the low-mid 120s), it was the current boom and the post-WWII boom that showed the largest moves in percentage terms.

The current boom, highlighted in the graph, has taken the index from a low of around 110 to a high near 200. This is an upward move of about 81.8%. The price move of the WWII era took the index from a low of 70 up near 110, a 57% gain.

What everyone would like to know is, how will this cycle play out? Will the recent move up to 200 end in a bust or will prices level off slightly before forming a new, higher plateau?

If the current move was to repeat the cycle of its recent forebearers, we'd see an approaching top and an ensuing move down towards the lows of the last cycle bottom. This would bring us down to the 110 level on the price index, back from whence we came.

On the other hand (now I'm speaking like an economist), we could have a slight retrenchment from the speculative price highs and a sideways market for the next couple of decades. Prices might fluctuate a bit but be rangebound at a higher level, say 180 and 205 on the index. After the WWII era peak, the index declined to a low of 100 on the price index and prices stayed mostly within the confines of 100 and 120 for the next 45-50 years.

Of course, both scenarios are simply repeats of what has happened before and we know that future events are not likely to be a simple replay of the past.

For those of you who are very bearish on the national price level of homes in the aftermath of the "housing bubble", I note that a line of support could be drawn in at around the 105-108 level by connecting the lows of the early 1950s with the lows of the 1980s. This level held the last decline of the 1990s (prices consolidated just above that trendline) and could be seen as major longer-term support. Watch out if prices breach that support to the downside!

But who knows, we could be in the midst of some demographicly-driven price rise, as was the case in the post WWII era. Then, returning GIs and their mates found a period of stability at home, which led to the creation of new families and kickstarted the Baby-Boom. This gave rise to the new trend for suburban housing and development, a trend that has since shaped the face of this country.

In recent times, mortgage lending has been extended to even the more marginal applicants and creative financing has allowed an ever increasing pool of buyers to own their own home (for a while anyway; recent foreclosure levels have risen dramatically). While the impending slowdown in housing will hit the most extended purchasers and speculators, maybe demand for houses will pick up as prices ease off.

We know that there has been a large influx of immigrants into the United States in recent years; some of those people will no doubt create demand for housing. However, I must note that this type of population influx did not keep prices from falling during the 1890s to 1920, and this period encompassed one of the "Great Waves" of immigration into the U.S.

Will foreign buyers of second homes in the U.S. create enough demand to keep prices high? Somehow, I don't think that will be enough to do the trick. As they say, only time will tell.

Related articles and posts:

1. Home prices continue to slide - Finance Trends Matter.

2. Skateboarders ride California foreclosure wave - Finance Trends.