In 1996, unemployment was low, the economy was booming, stocks were rising, and the future looked bright. Email and the internet were just starting to make their ways into homes around the country. Optimism was high as an economic revolution was brewing.
Is there any reason why homes today should be worth twice as much as in 1996?
Graphically, prices were heading right back to 1996 until the government decided to spend trillions of dollars to prop them up.
Consider what’s been done to halt the collapse of home prices. Our demand for homes has been artificially boosted with low mortgage rates and tax credits, and our supply of homes for sale has been cut drastically by all of the foreclosure prevention efforts.
Here is the result:
For some perspective, check out the original Case-Shiller graph that shows home prices, adjusted for inflation, for the last 100 years or so. Note that the numbers are slightly different because this chart includes all national data, not just large cities.
Now consider this:
Looking at long-term trends, we each must fall into one of two camps. Either you believe that, eventually, home prices will revert back to their relative historical norm because people can only pay so much of their monthly income for housing. OR, you believe that this time really is different; that people going forward will be willing to pay relatively more each month for shelter than for the last 120 years.
I don’t see how this time is different. I don’t know why, socioeconomically, people will pay more of their monthly paychecks for housing over the next 120 years than they did for the last 120. Sure, you can make a case that a particular neighborhood or town has become more desirable, but that is irrelevant on a national scale.
In short, if you believe that the economic growth since 1996 was robust enough to justify the doubling of home prices during that time, then perhaps home prices are now at the “correct” levels. But if you believe that most of the economic growth since 1996 was built on bubbles and debt, then it’s hard to find a reason why homes should be twice as expensive.
March 30, 2010 at 9:58 pm
I wrote an article about this at http://spiritnewsdaily.com/?page_id=628 and very much agree with you. Fasten your seatbelts, as Patrick Swayze said in Road House. It’s gonna get worse before it gets better.
donovan moore
editor
spiritnewsdaily.com
March 31, 2010 at 4:15 am
“I don’t know why, socioeconomically, people will pay more of their monthly paychecks for housing over the next 120 years than they did for the last 120.”
I could see that people will have to pay more for housing than they did in the past. I can see people paying more for a whole lot of things relative to their paycheck. It’s called a lower standard of living and arises from competition with slave labor as a result of globalization. Anybody that thinks that the US can compete with countries that employ slave labor, don’t honor intelectual property/patents, pollute to their heart’s delight, have no product safety or recourse (toxic drywall, lead paint, poisoned pet food, etc.) and don’t provide any social benefits to their population is sadly mistaken.
The size of the overall pie stays the same, it’s just that our slice became a whole lot smaller. As they say “Historic performance is no guarantee for future results”. During the past 120 years the US was rising to the top, the next 120 years will not be as kind.
March 31, 2010 at 8:26 am
I live in the San Fernando Valley in Los Angeles Ca, and in 1996 an average 2 bed 2 bath 1200 sq. ft. home was around 150K-200K depending on the condition. During the bubble max in 2006 those homes went for 675K.
People are still asking for 350K-500K for those same termite infested houses that are now 15 years older from 1996.
However unemployment in CA is 13% but I believe they are playing with the numbers and it is actually around 15%. Also salaries have gone down not up for regular jobs. Food and electricity and gas cost more so you tell me…how long can it last.
The only thing I can say for sure is that banks will not release the shadow inventory because their balance sheets will go negative, and the homeowners who over paid are thinking that inflation will solve the problem and re-correct the asking price.
The answer to all of this is really simple, let the market continue to build up pressure, and when commercial and residential real estate in California totally collapse and intrest rates begin to climb…prices will revert to true values.
March 31, 2010 at 9:21 am
If you really think we will see 1996 nominal prices again, you are an idiot. Judging from your second chart, with that area shaded in yellow, you seem to suggest we are going to hit a nominal value of around 75 when the bubble is done bursting – horses**t.
Looks like your problem is you are equating the nominal Case Shiller (currently around 145 or so), with that INFLATION adjusted “100 year home value chart”. What you dont seem to recognize is that the Case Shiller numbers are NOMINAL, meaning they will go up over time with inflation.
Thus, even if you assume 1996 was a good baseline value (a bit dubious but whatever), due to inflation, that 75 we saw in 1996 is the same as 104 today. Thus, unless we had a massive undershoot, under your theory that 1996 was a fair value, we should see Case Shiller go NO LOWER THAN 104.
This is a very important point to make, and is unfortunately lost on so many pundits thanks to that stupid 100 years value chart. If case shiller was now at 104 you would probably shade the value between 104 and 75 in yellow and again say, “prices need to fall” – nope. What you are failing to account for is that one chart is inflation adjusted and the other is nominal. Please be more careful next time.
March 31, 2010 at 9:32 am
Here, just so there is no confusion next time, here is your 100 year “history of home values” on a nominal basis.
http://img527.imageshack.us/img527/4954/chartusa1900nominal.png
Just keep this in mind when you decide what nominal value you think of where CS will end up settling. I dont know what it is but I can assure you it will not be 1996 nominal values.
March 31, 2010 at 9:53 am
Wow,
Those numbers aren’t adjusted for inflation. In your chart, you can see real divergence from CPI doesn’t happen until the late 80s bubble, then really takes off in the mid 1990s.
March 31, 2010 at 10:04 am
One problem with the CPI adjusted chart is that CPI includes housing. Since housing was increasing well above wages and other goods, CPI is radically distorted.
Try adjusting that chart with CPI less housing, or with wage growth, and you will see something quite different.
March 31, 2010 at 10:16 am
“Those numbers aren’t adjusted for inflation. In your chart, you can see real divergence from CPI doesn’t happen until the late 80s bubble, then really takes off in the mid 1990s.”
Thats why I said they are nominal – they are the actual nominal value of homes at each point in time, adjusted over time. Either way, look how different that chart is than your 100 year chart. Your 100 year chart shows values being (more or less) at 100 going back to 1890. My chart shows that a nominal value of 200 in 1996 is EQUAL to a nominal value of 10 in 1890.
Thus, again, the problem is you seem to suggest the NOMINAL CS will get back down to 75 when everything is said and done. Given the history of NOMINAL prices that I have shown you from 1890 – 2010, there is no chance we get back to 1996 nominal value of 75 ever again.
My 100 year chart
March 31, 2010 at 10:25 am
If that doesnt make sense, look at the first chart you note which has a CS nominal value of about 62-63 in 1987. See how it rose to about 85 or so in 1990, and fell to about 75 in 1991?
Using your analysis, someone looking at that chart in 1991 would say, “should a house be worth 75 now when it was 62 back in 1987″? The 1991 version of you would yellow in the area between 75 and 62 and conclude it will “come back down” to 62.
Again, the 1991 version of you would be mistaken as its clear, 75 was pretty much the bottom (where it pretty much stayed til 1996 as inflation worked its magic). Dont make that mistake now.
Again, im not saying its the bottom now – we very well could go lower before we see a long flat period once again. But if you think we will ever see a nominal value of 75 ever again, you are sorely mistaken.
March 31, 2010 at 10:34 am
I believe the chart is correct, but I don’t think prices will dip back to 1996 levels, maybe 1/3 of that if any. The reasons are: the value of the dollar is dropping, food and other commodities are being monopolized by fewer companies, rising population, and rising global equality force americans to compete more for resources such as food and shelter. And lastly, people are irrational: they will always be willing to pay more than a house is worth, which sets the market price of a house higher than it should be. So if you want a house you have to pay the ‘irrational tax’. Lastly, a house is a big price item, so banks, reaitors ect have a lot to gain by conspiring to sell a house for more than it’s worth, and they are only getting better at it.
All of these useless realities, i suspect, will keep the housing market from droping back to a ‘pure market level’ The market is getting less and less pure, and that isn’t looking to change.
March 31, 2010 at 10:42 am
You should lput this on a log scale and add some 3% and 5% compounding rate sof returns as a benchmark. Price levels from 87 to boom tracka 5% ROR alomst exaclty. And we bacto that elvel no if not a lbit below it.
March 31, 2010 at 10:43 am
No, on your chart, I would suggest the nominal prices would go back to around 200.
March 31, 2010 at 10:50 am
Gmonkey…that’s part of the point. We are all taking for granted that home prices will appreciate faster than inflation…which they have since 1987.
For home prices to rise faster than inflation (and therefore incomes) over time, people will be paying an increasingly greater percentage of their monthly incomes for shelter. Trendy recently, but not sustainable.
Long term, home prices cannot go up faster than our ability to pay for them.
March 31, 2010 at 10:58 am
forget adjusting for inflation/cost of things instead simply look at wages, if wages are not matching CPI inflation then there is less buying power, if money is just overall just worth less, wages should reflect that in higher values, but if wages are not higher, who cares if some other things like food have gotten more costly compared to wages, does not mean housing is more affordabe …
and also need to factor in the cost of money (intersest rates) I think we would have a much better idea what aveage house price should be based on last 100 years…
Mortgage interest rates in 90s were what, 7-8 percent? now they are will be 5-6 percent, that cahnges monthly costs and affordability and subsequently price people are willing to pay so some price appreciation is due to cheaper money, and that is a cost of housing as suredly as is property taxes and principal payments..
so if you chart median price of housing (house prices and interest rates) as ratio of median wages…I think that would show you truly where we are on long term trends.
Please note that housing and medical services have likely permanently increased as a share of peoples wages because of the way we pay from them…via long-term monthly payments either for insurance premiums or 30 plus year mortgages…anytime you let someone “finance” something they are willing/able to pay more for said commodity as they do not need pay up front…so explopsion of consumer credit liking have forever changed house prices compared to when you could only get 5-10 year mortgage, so unless 30 yr mortgages dissapper altogether and market goes completely cash, we will likely never go as low as when that was the housing market…
March 31, 2010 at 11:17 am
“Greg said…No, on your chart, I would suggest the nominal prices would go back to around 200.”
Well thats just as dumb. Thats like saying in the year 1991 that we will get back to a nominal value of 135 cause thats what it was when the last bubble started in 1987. Thus the 1991 version of you would be suggesting we get back to 135. How would that have turned out???
March 31, 2010 at 11:22 am
Sorry, heres the chart again as I want to make sure this is crystal clear
http://img527.imageshack.us/img527/4954/chartusa1900nominal.png
The 1991-1996 version of you would say, we shouldnt be at 200, we should be at 135. The 1997-2010 version of you would be looking on in horror as we got farther and farther away from the nominal value of 135. Hopefully, somewhere along that line, you would have realized you had made a mistake and that we would never, ever see nominal 135 ever again.
March 31, 2010 at 11:28 am
My bad…you’re right…I wasn’t looking closely enough. I would expect the CPI and CS Index lines to converge again. CPI is declining, but I don’t think they’ll end up meeting all the way at 200. 275-300 maybe on your chart…or about another 25% maybe.
Just curious, are you thinking that home prices have bottomed?
March 31, 2010 at 11:33 am
That’s true…and 100-year mortgages would enable even higher prices with the same monthly payments.
However, 30-year mortgages were around well before 1996. Yet, looking at the original CS chart, that’s about when prices diverged from their historical average of about 110. Certainly 30-year mortgages are a piece of the puzzle, but not a big piece.
As far as mortgage rates, they certainly fueled the fire. Eventually, rates will rise, bringing down prices accordingly.
March 31, 2010 at 2:14 pm
Any thoughts as to how long it will take for housing to bottom out if it hasn’t already? 6 months? 1-2 years?? 5 years??? How many people would be willing to wait it out if it takes 5 years?? I cant stand the thought of going back to renting, but I also dont want to get stuck with an overpriced home that will take me 10+ years to have any equity in.
March 31, 2010 at 2:30 pm
Depends where you’re at. Some places like Stockton and Antioch have seen prices back in the 80s. Others, like Danville, are still in the early 2000s.
I can tell you that I was looking at a house for sale in Danville recently that seemed low, priced around 800K. Then I looked at the history and saw that it sold for for $430K in 1998. (no noteworthy upgrades).
I do think prices will go back to about mid 90s levels on average in most places…back to where they were before things took off.
Certainly we still have 3-5 years more of this mess to go just to work through all of the coming foreclosures.
March 31, 2010 at 2:34 pm
Great topic of discussion and I have thought about this as well. Aside from all the govt prop ups that are currently skewing the marketplace one has to realize that incomes for the middle class remained relatively stagnant in the last 10 years. One should also recognize the fact that inflation for the last 10 years ranged about 25% (housing prices generally travel in tandem with inflation).
What many fail to realize is that the housing market was in a mini bubble btw 1998-
2001 even BEFORE the blantant and obvious bubble even existed- especially in the coastal markets that rose 1st. I personally believe the 96-98 period was simply a correction from the bubble experienced in the early 90s.
BTW, there is not a shortage of land in the “land constained” coastal markets. NY metro has room to sprawl north & westbound, DC in all directions, LA into the IE & Antelope Vlly, SF Bay eastward into the San Joaquin Vlly, etc, etc. Skyscrapers do not dot every parcel in Manhattan- thus even the densiest of locations still have room to expand vertically. If anything most municipaties that cry the land shortage theory really still employ 20th century ZONING limitations in the 21st century. What is shocking to me are the muted opinions about this topic in general.
So even in the coastal markets- which the consensus believes is more land challenged- there is still room to expand (add supply) to match growth. Dont even get me started on the inland US metros (Phoenix, Dallas, Atlanta, etc).
Home prices should fall back down to the early 2000 range in the coastal markets- whether or not they do is another question.
March 31, 2010 at 2:42 pm
What’s your point?
I do believe that home prices, in actually unadjusted dollars could and perhaps should return to mid 90s levels. Do you agree? Or disagree?
You accuse me of making an error with in suggesting a nominal 135, but I never did. On your chart, 1996 is between 200 and 225.
Is your overall point that home prices will never reach nominal 1996 levels?
March 31, 2010 at 3:25 pm
I am in the Roseville area (outside Sacramento, CA), and it seems like the price range I am looking at (350k – 450k) is still about 50k – 100k overpriced. Also, there aren’t nearly the numbers of homes in that range you would expect for this market, especially given the unemployment situation, which is probably keeping prices higher.
I guess if I want to buy soon I will have to resign myself to staying in the home for a long time (and hope I dont get laid off!)
March 31, 2010 at 4:49 pm
Correct. Let’s look up what a gallon of gasoline cost in 1996. A movie ticket. A Whopper at Burger King. 1996 is 14 years ago, if you allow only 3% per year appreciation where does that bring us?
March 31, 2010 at 5:29 pm
That’s exactly his point. Why would someone think that nominal prices would return to 1996 levels? That seems obviously false.
March 31, 2010 at 5:36 pm
I’m sorry, I’m really confused. You’re saying that 5 years from now, fully 17 years after the last recorded sale for the home in Danville, that the prices would be the same or lower than in 1998? I’m lost; how does that make sense?
Let’s of crazy stuff went on between 2002-2006. But, I’m afraid if you’re waiting for a time when you can buy a home in Danville for free, you’re going to be disappointed.
March 31, 2010 at 6:38 pm
In a lot of places, in California at least, they already have.
Everywhere is different of course…
March 31, 2010 at 7:02 pm
I’m not sure where the disagreement comes from. If you look at the charts, it’s clear that we’re still distantly disconnected from a long historic pattern.
My predictions:
- It’ll make it to 100 once the shadow inventory and government manipulation is released and market forces take over, but foreclosures may jump higher as a result. Combined with the tendency of markets to over-correct in both directions, it could easily hit 50-75 in the next couple decades. 100-110 is roughly where it will land, though, unless something seriously breaks.
- If the other shoe drops and depression sets in, we’ll probably see prices in numbers of the early 1980s, with similar interest rates, roughly akin to the 1920s/30s/40s troughs.
The main downside I see is the liquidation of the post-WWII baby boom super-bubble, which starts in 1-3 years and peaks in about 17 years. It will add roughly 3-5M extra properties to the for-sale inventory per year through at least 2030. The majority of this generation have no savings aside from equity in a home, and SS will need to start cutting benefits just as the front edge hits retirement age. The price depressing effect of the additional inventory will be with us at least until 2040-2050, which is when basically all the remaining members of the generation that were in good health (physically and financially) finally liquidate their housing. Mind you, this is just housing, so it doesn’t count their collective exit from the labor, income tax, and similar pools. If they choose to retire, which many may not, they will reduce the demand for effectively everything. The peak of the RE bubble coincided with the peak lifetime earnings period for the largest segment of the baby boom. I think this is significant, and our current downturn is closely related to the pattern of a large drop in spending on the spin-down toward retirement.
For an example, think back to your parents and grandparents homes. Weren’t they basically stuck in a time warp from the era when they were in their 40s? I know mine were. It was glaring, looking back at it – mom’s parents were older and their house was decked in the best 1950s and early 60s stuff. Dad’s side was 1960s and early 70s, and it showed. My aunt just died recently and her place was late-70s to early 80s, which matches the age perfectly. My parents just dropped off the bandwagon, as have their cohort; they have all the furniture, appliances, marble counters, and house they will ever need (and, really, far more than they ever needed).
Am I crazy, or does this seem like a good reason we might see a further and more rapid decline in the coming decade?
March 31, 2010 at 7:46 pm
The history of credit expansion shows that we face deflation, not inflation. House prices will reach 1996 levels, and sail past on their way down as they overshoot the correction – this is standard in systems dynamics. But most people
March 31, 2010 at 7:57 pm
… don’t understand the role the massive credit expansion has had on inflation and the role the subsequent contraction will have – i.e. deflation in markets such as real estate
March 31, 2010 at 8:20 pm
All I’m saying is that it’s possible that, yes, even in Danville, prices could get back in to the 90s.
I don’t know what’s going to happen, but we’ve got a heck of a lot of mess to get through before we find a real, healthy, organic bottom.
April 1, 2010 at 5:30 am
There has never been a bubble that hasn’t returned in real or nominal terms to its pre-bubble period…NEVER. You can look at the Tulip mania, South Sea China episode, Railroads in the 1870s, Florida land in the 1920s, tech bubble, etc. Maybe homes will find a level above the nominal prices of 1996 due to inflation, but inflation has been muted since that time frame.
A home that sold for $150,000 in 1996 should be selling for $211,000 assuming a 2.5% inflation rate. With deflation taking hold right now, that would probably mean a lower price.
Secondly, housing is not part of the inflation calculation as was mentioned in the comments. Had it been inflation would have been much higher. Owner equivalent rent was used. This kept inflation substantially lower. Of course, now the government wishes they could avoid using that figure as rents are falling.
April 1, 2010 at 11:08 am
FYI, deflation ended a few months ago.
http://inflationdata.com/inflation/Inflation/AnnualInflation.asp
April 1, 2010 at 2:55 pm
Reading a bunch of realtors talk about housing price points is pretty amusing.
Nobody who bought a home with a mortgage after 2003 will be in it within 24 months, since pricing are far from bottom levels, no matter where the bottom will end up. The fact that most are underwater now and the rate of jingle mail increases every month means that the herd will walk away from these dogs en masse soon enough. There will not be an profits in real estate ownership for at least 10 years, perhaps longer.
I paid cash for my place and would love to walk away with that cash still in my pocket. Worst investment I’ve ever made – 2004. Sure, the government’s going to help people with loans – they have to, else we lose 3000 “FDIC Insured” banks a year. Those of us who own outright? Screwed as values collapse.
Most suburban homes will be razed for salvage over the next 10 years, then occupied by homeless squatters. Go ahead and pick up some bargains today if you think the bottom’s here. Do it with you own money, please – banking’s insolvent now thanks to the housing idiocy already. Don’t make things worse.
April 2, 2010 at 1:26 pm
Original question:
“Is there any reason why homes today should be worth twice as much as in 1996?”
Answer: Only if you have a system to protect.
Or if you wrap your lifestyle costs into your home and want someone else to pay for:
1. Your previous divorce(s)
2. Your kid(s) college education(s)
3. The entire cost or downpayment on a “move-up”
4. Your retirement savings which you failed to save for since you were living “for the moment”
5. Plastic surgery, vacation(s), a luxury car(s)/SUV(s), jewelry, and/or any other lifestyle acoutrements that you deem necessary to live a glittering rich lifestyle.
Add up numbers 1 through 5 and this is why housing costs rose two, three, and four times as much as what the owner paid for a property in 1996.
April 4, 2010 at 8:00 am
Except if you think that expensive houses are the sign of the pre emption by old generations of the future earnings of young generation. That may be te case : many cities restrict the building permits, … Guess what: young people do not vote, they are not active politically, are not organized. Civil wars between young and old people will spread first in Europe and then in The US. China is not protected, on the contrary; funny times ahead.
April 5, 2010 at 12:31 am
Lol, you must be a broker or realtor ! Get ready to eat some crow . Prices will continue to fall and could easily reach 1996 prices ! Only a IDIOT says otherwise !I think it’s time for you to take off your rose tinted glasses fool ! I bet you’re just upset because you paid 5 times what your house is worth ! Ive been developing real estate , building and investing for years ! We are far from the bottom and could see an additional 20-40% drop in prices before a bottom is reached ! Maybe more! YOU ARE THE IDIOT FOOL !
April 14, 2010 at 6:23 am
I agree that house prices will drop back to historical levels…and then some. This housing boom is the largest in history, (maxed-out, loose credit + superlow interest rates) just as crazy as the tulip bulb mania. What will make this time worse, is there are no real jobs here in the bayarea compared to previous RE cycles. We have no factories, and with everything costing more than in past decades, including healthcare, I believe house prices will fall all the way back to the 1980′s levels just because of the overbuilt factor on top of all of the above reasons. I think prices won’t bottom out until 2014-2016; afterall, it took 10 years for this bubble to burst, and will probably take the same time to competely deflate.
May 3, 2010 at 7:48 pm
I couldn’t agree with you more. I don’t know why people make it so complicated. Just look around you in California. The house of cards is on its way down sooner rather than later……
May 10, 2010 at 4:42 am
@Seeingeyedog: You’re right on the mark. One quick and dirty way to determine value is to determine what buyers are willing to pay / can afford to pay for homes.
To use myself as an example (And to counter Thibs absurd argument in regards to young people being so ignorant), I make 100k per year, with roughly 2250$ a month in expenses. A “safe” price range for me would be between 90 – 100k. You can’t even find a decent home for 100k anymore. Salaries remain stagnant while all other prices across the board continue to rise, and home owners wishfully assume their home is this imaginary asset that continues to increase in value. I have to ask, why? Past precedence doesn’t necessarily dictate future truth.
May 21, 2010 at 8:49 am
Yo Bubba,
You are right on – I plotted this chart about 6 years ago, and drew some extrapolation lines down. Back when everyone was jumping into the ponzi scheme, I asked: Why are mortgages so much more than rents – are you crasy?
Now it seems as an engineer that since 1996, we have outsourced more, graduated fewer scientists, and basically terminated the middle class. This is root cause of the real valuation that I feel must come. Obama cannot tax, stimulate, spend, outsource, expand the money supply, inflate our way to properity.
Rather the real-estate bubble initiated by B. Clinton using the CRA was a poor replacement at gaming the system. Instead to build the fundamentals we need to focus more on Science, Technology, Manufacturing, R&D, Energy……….
Without real middle class jobs, this may not end well………..
May 24, 2010 at 11:40 am
Good points. One thing that could account for higher real values, is that on average homes are bigger than they were in 1996. If people do want bigger homes now than in the past, which they do, then that accounts for some increase in prices, but no where new twice the value….
May 24, 2010 at 1:09 pm
It’s also true that homes have been much more updated in the last 10 years than from 1986-1996. There was much more home equity extraction and remodeling.
The average home today is both a bit bigger and a bit fancier than in 1996.
May 21, 2012 at 11:38 am
Agree that those towns all have different data pre-2000. The porelbm is that it doesn’t really exist at least it’s not published that far back by Case-Shiller. For what it’s worth, San Francisco prices peaked just above 200 on their metric, or double the Jan 1, 2000 price this is only slightly higher than the country as a whole, illustrated by the 20-city composite and also visible in the smaller, classic graphic.