WatchIt really seems lately that house prices are inflated more than they were say.. 30 years ago when our parents owned. So I'd like to do some number crunching to see if this is true.
Case Shiller Index, past 100 years.
http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/
The Case shiller index gives a decent overview of the economy over the past 100 years. However, I find flaw in using an average line in determining where home prices should trend towards. A lot of crazy world changing events have happened in the past 100 years. 2 world wars, great depression, numerous life altering inventions (A/C, Computers, Car). Therefore I'd like to take a look at a graph that starts a bit more recently.
http://www.jparsons.net/housingbubble/
This guy gives a chart, and a trend line, starting around 1970.
Now let's compare it to the great income chart that is currently on Patrick.net
The inflation adjusted income chart shows an increase from $41,000 to $50,000 from 1967 to 2012. An increase of 21.95%
For the middle link on house prices, It starts in 1970 but I believe $140,000 starting in 1967 is pretty accurate. So housing increased from $140,000 to $170,000 from 1967 to 2012. An increase of 21.43%
Well, that is pretty anticlimatic. I can draw a conclusion that as of 2012, house prices are in line with earnings over the last 45 years. So in most areas of the US, I shouldn't really complain too much about the cost of a house.
However, what goes up must come down. There are still a few factors that I believe will have the house price graph dip below the trend further.
1. More people own homes now that traditionally do (was it like 64% vs 68%?) This should trend downwards toward the normal.
2. Excess inventory.
3. Very recently wages are trending downward.
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Do you think there will be an undercorrection? If so, how much?
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I believe house prices will still trend downward because:
Banks got spanked giving away "easy money" pre-bubble and now need to reel it back in. We are already seeing how the banks are tightening up the lending requirements. Remember when the mortgage qualifying was max. 28% of monthly income??
Wages are trending down, so even though interest rates are at all time lows, you still need a decent and stable income to buy. A lot of people have been having problems with wages recently.
Besides the FHA 3.5% loans, many banks are pushing for higher down payments (20%) to help cushion their exposure.
There will be more REO's, short sales and foreclosures in the future that will need to clear the market. Many of these houses have been neglected and will need a lot of work, which will push overall prices down.
Overall, doesn't look positive for prices to climb back up...
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Call it Crazy says
That's not entirely correct. The tightening credit was due to Fannie & Freddie's guidelines after the mortgage meltdown. Over 96% of loans were sold to Fannie & Freddie in the recent years. Basically, banks are making their margin and selling all loans off to Fannie/Freddie.
Banks don't care if you're putting 5%, 10% or 50% down. They will likely sell your loan to Fannie & Freddie anyways. For loans with less than 20% down, that's what mortgage insurance (MI) is for.
Banks are tough on lending because they don't want to be responsible for it after the loan is sold off. Tell Fannie & Freddie to loosen up their lending standards, and we will have another housing boom. :)
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I just checked, more like 22k for an average house price in 1967
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tdeloco says
No doubt. If the housing market stays flat for the next 3-5 years, real price would likely drop about 10%-15%. Based on history, that's likely to be the case. I'm just hoping for more inventory in the next 3-5 years so I can finish my shopping. There's hardly anything to buy right now. What a weird market.
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E-man says
There are plenty of multi million $ mansions on sale,if you are interested!
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FloridaBill says
$140K in 1967? Are you sure that's not supposed to be 40K instead? And that would be for a big house in 1967. That's what my parents paid for a 4 bedroom house in 1969 near the beltway (AKA Permieter Hwy) in metro Atlantia.
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zzyzzx says
It is 22k. I checked.
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APOCALYPSEDUCK is Shostakovich says
The 140k is inflation adjusted
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The adjustment is wrong.
Houses were reasonably priced in 1967.
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APOCALYPSEDUCK is Shostakovich says
What is 22k adjusted for inflation in 2012 prices?
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Who cares? All the inflation models are designed by gangster fucks that live and die to make debt seem like something less than the horror it really is, figuratively the Zyclon B of family finances.
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APOCALYPSEDUCK is Shostakovich says
I've met quite a few people that believe inflation is understated, but not too many that disregarded it completely.
Do you get shocked at the price of food everytime you walk into a grocery store too? Or were they only reasonably priced in 1967 as well?
But I guess if you're hoarding guns and growing your own food, inflation can be ignored.
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zesta says
That's my strategy...
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zesta says
No. Rice, chicken, beloved spuds and high quality fruits, fresh oranges, be still my heart, are very reasonable and food prices for the basics that get measured for our inflation indexes have been really reasonable from the 60s on out. That's why inflation is understated. If you factor in the household medical health premium, tuition - even at state universities - and housing, yeah, official rates are kind of a joke.
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APOCALYPSEDUCK is Shostakovich says
Those are factored in.
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tatupu70 says
Yeah right. The gov't has a HUGE incentive to understate inflation.
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wthrfrk80 says
Be careful--you're approaching tin foil hat territory. Do you disbelieve all government numbers or just inflation?
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tatupu70 says
the whole house number? or just mortgage?
the whole ship the kid off to live without working an under the table job far away number? or just tuition?
The stuff used in those calculations is nowhere near reality.
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APOCALYPSEDUCK is Shostakovich says
So, you don't know the methodology, but are sure that "the stuff used in those calculations is nowhere near reality"?
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tatupu70 says
I don't blindly believe anyone who's trying to sell me something. Do you?
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wthrfrk80 says
Nope. I would agree if you said that inflation is hard to calculate accurately. Or that the substitutions used by the government are sometimes debatable.
But to infer that the government purposely doctors the official inflation numbers is getting out there.
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If you consider that college used to be optional but is now a necessity (unless you want to spend your life making minimum wage) that's huge. And if healthcare costs aren't skyrocketing, why are so many demanding socialized medicine? And in some parts of the country, housing costs are still crazy relative to incomes (Boston, NYC, DC, SF, LA).
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Who cares? The average household income in 1967 was around 40K which I think is a little high and doesn't represent all the people who were running cash businesses, musicians, writers, drug dealers, day labor, etc. every day people who never show up on these things.
Still even if you halve that number to 20K, it still roughly comes out that the price of a house was 1x average household income.
Average household income has risen to about 50K which I think is about on the money likely because reporting income to IRS is 100x more efficient these days. There is no such thing as a 50K home that has a roof and walls these day - unless it's on wheels.
Which tells me the inflation indexes are completely beside the point.
All you hear these days is that RE is underpriced, every 2 bd condo in Stockton should be worth at least seven figures in a year or two. And everyone from the NAR and banksters run around pulling their dicks and screaming and foaming at the mouth that of course, of course, the price of housing is supposed to be doubling every month or so. It's only fucking normal!