Consumption Rules

History of Home Values

Do you think we’re in a housing bubble?

Share This

This entry was posted on Tuesday, August 29th, 2006 and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

(Somewhat) Similar Posts:

Does America Have What It Takes To Stop Terrorism?

Some Americans have suggested that the war on terrorism is a war that will never be won. There are many reasons why people hold...

Disappointing election season

The only person I would hate seeing in the White House more than Giuliani is Hillary Clinton. But the two are the front-runners in...

Wives Tales

[From utahpolicy.com and Article VI] Monday morning Kate O'Beirne of National Review was on Laura Ingraham's radio show. Among other subjects, O'Beirne commented on presidential...

Ivy League Females Opting to be Stay-at-home Mom’s

The New York Times reported that many Ivy league females' career path includes the desire to be a stay-at-home mom. I think the feminist movement...

2 Responses to “History of Home Values”

1. doug Says:
   August 29th, 2006 at 1:24 pm

   This graphic is unreal. It simply demonstrates how ludicrous housing prices are in the U.S…or, “home values”.

2. Brad Says:
   August 30th, 2006 at 11:48 pm

   Looking at this graph just makes me think of one thing - imminent market correction. This trend can’t continue, and so those that are buying houses now, at or near the apex of home prices, could be hit with a rude awakening when they start to realize that real estate isn’t a guaranteed profitable investment. The Wall Street Journal ran an editorial today about the signs that precede a downturn in the housing market - basically when people stop buying, or when demand slows down. Some excerpts:

   Looking back at past housing booms, the first sign of the end is when a goodly share of buyers stop making offers and eventually stop looking, seeming to just disappear. In the spring of 1987, during another U.S. housing-market boom that was starting to lose speed, Nora Moran, president of the Greater Boston real estate board, said “someone blew a whistle that only dogs and buyers heard.”

   Across America today, it is as if the whistle has again been blown. New home sales in July are 22% below July 2005. The decrease is 43% for the Northeast over that same period, and the inventory of unsold new homes is up 22%. Existing home sales are down to 6.33 million in July from over seven million at the end of 2005. Older boomers are cashing out of valuable suburban homes and heading for condos in the city, or out of high-priced regions altogether.

   …New construction, initiated in response to high home prices, has reached unprecedented levels, and new houses are still hitting the market just as demand is dropping. Between 2000 and 2005, housing starts were over two million per year, existing home sales were over six million per year, and home-improvement spending hit $162 billion in 2005. All of this generated income for millions of brokers, builders, bankers, appliance dealers and construction workers, and kept the economy growing at a strong clip. But the housing construction boom can’t go on forever.

   This incredible boom has been fueled in part by favorable demographics, low interest rates, a very liquid mortgage market with low down payments and borrower-friendly underwriting (option arms, interest-only, stated-income, etc.), a baby boomer generation with a special taste for housing, a substantial volume of foreign demand, and the poor overall performance of the stock market.

   …The U.S. now has a futures market based on home prices. The market that opened in May at the Chicago Mercantile Exchange is now showing backwardation in all 10 metropolitan areas trading. The backwardation can be expressed as implying a rate of decline of 5% a year for the S&P/Case-Shiller Composite Index by May 2007. Since the margin requirement is only about 2.5%, an investor who is sure that prices cannot actually fall by next May has, on that assumption, a sure return of at least 200% from buying a futures contract, and even more if prices rise at all. But there can’t really be so much “money on the table.” It must be that people really no longer see it as a sure thing that prices won’t start falling across the metro areas.

   As always, the future is uncertain. Many of the underpinnings of the boom are still strong, and the soft-landing scenario so widely promoted by economists and industry leaders is a possibility if the U.S. can avoid a generalized inflation, if long rates don’t rise a lot, and if the rest of the economy stays strong. But that possibility is not enough to give great comfort to all those who worry today about the housing market.

   Unfortunately, there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected. Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today. Listen hard and watch out.

   [The authors:] Mr. Case is professor of economics at Wellesley. Mr. Shiller is professor of economics at Yale and chief economist at MacroMarkets LLC.

   From wsj.com

Leave a Reply

You must be logged in to post a comment.