patrick.net

game, I think that both the Shiller and Lawler plots are reasonable. Shiller himself isn't sitting around calling for a reversion right back to 100 on his graph. A little while back, he was saying that another dip was possible, but that prices could continue up as people get excited again.
I've been guessing that prices still have some falling to do based on the Shiller plot, but am unsure. That is why I spent so much time on this thread.

thomas.wong1986 says

MarkInSF says

By the way, Shiller was hardly alone

Actually he was very much alone. His book Irrational Exuberance 2nd edition came out in 2005. However he did make many appearence on CNBC as well as write a couple articles around 2002 and 2004. Around that time, he was the only one talking about “bubbles” and much laughed at.
http://www.businessweek.com/bwdaily/dnflash/aug2002/nf2002082_7132.htm
Home Is Not Where the Returns Are AUGUST 2, 2002
“The fear doesn’t seem irrational, especially with signs that the economy is rapidly losing momentum. Home prices are unhinged from the economic fundamentals in some parts of the country, such as the San Francisco Bay Area. “The clearest case of a speculative bubble in the U.S. recently, I believe, is the Bay Area — San Francisco, Oakland, San Jose, Silicon Valley — where prices were rising at a tremendous clip,” says Robert Shiller, economist at Yale University.”

If you are trying to support the notion that Shiller is great at predictions, I wouldn't link an article that shows he was early by 5 years in calling the peak, not to mention the fact that for some parts of the BA, he's still just flat out wrong and prices are well above their 2002 prices.

MarkInSF says

For 1890 to 1934, Mr. Shiller used data from a trio of economists led by Leo Grebler. Because he found no index for 1934 through 1953, Mr. Shiller wrote, “I had my research assistants fill that gap by tabulating prices in for-sale-by-owner ads in old newspapers,” covering just five cities. For 1953 through 1975, Mr. Shiller used an index compiled by the U.S. Bureau of Labor Statistics, or BLS. An index from the regulator of Fannie Mae and Freddie Mac covers the period through 1986, after which Mr. Shiller uses the S&P/Case-Shiller index he created with another economist, Karl Case.

http://online.wsj.com/article/SB124051414611649135.html

This is good to know. After all that heated exchange, it's nice to see some factual information on Shiller's data sources.

roberto,
I guess the fact that the article said that prices were at a peak twice and used Shiller's comments to support this lead me to believe that someone saying the BA is in a speculative bubble meant that an impending burst of the bubble was near. So the fact that Shiller said the BA is in a speculative bubble in 2002 and now we're in 2011 with prices higher than 2002, what does this tell us about his predictive skills? Are you saying he doesn't predict, and anything he creates should not be used for predictive purposes?

YesYNot says

Shillers long term chart is for the US, and shows a $30,000 house in 1940 (adjusted for inflation) going for $50,000 in 2000. The median sales price over that time went from $30,000 to $120,000

Whoa, threre. Let's stick with the section of the graph that's based on BLS data I think I've already shown 1940 to 1953 data is highly suspect. 1953 to 75 was the BLS data.

The Shiller/BLS chart shows housing prices going slightly DOWN in inflation adjusted terms from 1953-1975. If I linearly interpolate the decade census data, it shows the median home price going up by 42% in those 22 years.

Does improvements in the median home account all that 42% rise? Possible... but that's would be awful lot of old homes torn down, and/or modern homes built in 22 years. The housing stock likely grew by about 34%, given the population did too. I'm not even sure that if the newly added housing stock was double the real construction costs of the median 1953 home it could budge the median by 42%.

Another data check: http://www.census.gov/const/pricerega.pdf shows the inflation adjusted median home price going up 24% from 1963-1975. BLS/Shiller show adjusted homes prices almost exactly flat over the same time period. Does improvements in size and plumbing or what have you account for a 24% difference in the median home price in just 12 years, given that the housing stock could not have changed that significantly? I find that much harder to believe.

Shiller asserting the the BLS data tracks the expected appreciation of a home standing in 1953, until 1975, seems highly suspect to me.

"Lawrence Yun of the National Associations of Realtors has ratcheted up his criticism of Shiller. Yun calls Shiller's index a "total distortion of market conditions based upon a small selection of falling local metro coverage."

And the minions of the NAR are still spreading their gospel.

Yun suggests that Shiller profits from creating fear. He creates fear so that people will want to hedge themselves against price declines by buying insurance against a free fall in prices. Where is such insurance available? Answer: on the S & P Case Shiller index traded on the Chicago Mercantile Exchange. According to Yun, Shiller has a "side business in Chicago. His index is used at the Chicago Mercantile Exchange for hedging housing futures values. The more hedging of bets that occur, the more profits go into Dr. Shiller's bank account. And more hedging of the bets will take place if people believe there will be a crash in housing values. So naturally he has a financial incentive to ‘scare' the market."

At the end of the day, we have a lot of Realtors, slick talking salesmen, on this web site... and they are very afraid the gravy train will stop.

YesYNot says

. I estimated that the price increase in median sales price due to size increases was from 50,000 to 105,000. That gets it up to 105,000 or within 15%.

Actually, saying the increase in median price from 1940-2000 is fully accounted for by changes in size and other improvements is a different assertion than saying a home that was standing in 1940, that is still as is today has tracked inflation.

It is entirely possible that appreciation is very slow initially after new construction, not even keeping up with inflation, but accelerates as the house gets older, and it's land value become a greater component of it's value due to crowding.

MarkInSF says

It is entirely possible that appreciation is very slow initially after new construction, not even keeping up with inflation, but accelerates as the house gets older, and it’s land value become a greater component of it’s value due to crowding.

Until prices drop as was the case in 89-92 and more recently. Anyway, land around here isnt that valuable when you have alternatives. Expensive yes. Nowdays industries have parked their operations far away from the Bay Area. So to speak of valuable land ignores that industries that fual paychecks are moving elsewhere. And that eventually will correct the imbalances we see and have seen in the past.

MarkInSF says

Actually, saying the increase in median price from 1940-2000 is fully accounted for by changes in size and other improvements is a different assertion than saying a home that was standing in 1940, that is still as is today has tracked inflation.

It pretty much is the same thing.
The WSJ article you cited says

Mr. Shiller's chart shows that home prices from 1940 through 2000 rose at an annual real, or inflation-adjusted, rate of 0.7%. Data from the Census Bureau, however, puts the real rate at 2.3% for that period. Part of the difference may be due to improvements in the quality of homes, Mr. Lawler says, but he doubts that accounts for the whole gap.

Mr. Shiller responds in an email that much of the difference "is indeed caused by quality change." He cites Census data showing that nearly a third of American homes lacked running water in 1940.

Both Lawler and Shiller agree that is what it means.

MarkInSF says

It is entirely possible that appreciation is very slow initially after new construction, not even keeping up with inflation, but accelerates as the house gets older, and it’s land value become a greater component of it’s value due to crowding.

I agree. A new house structure should depreciate at first, and that depreciation could offset or outpace appreciation of land. The index does not apply perfectly for any particular home be it new, old, in a tony neighborhood or in Detroit, so expecting that kind of accuracy is asking too much. The current methodology only reflects the average growth in a particular market. They define the average as the aggregate price. So each percent appreciation is weighted by the house price.

MarkInSF says

Another data check: http://www.census.gov/const/pricerega.pdf shows the inflation adjusted median home price going up 24% from 1963-1975. BLS/Shiller sho

Those look like new construction prices. The median price of all sales in 2000 was $120,000. That link shows $169,000, which is the median price for new construction. As you said, most new construction is in the region where a city is expanding and land values are increasing the most.

ch_tah says

If you are trying to support the notion that Shiller is great at predictions, I wouldn’t link an article that shows he was early by 5 years in calling the peak, not to mention the fact that for some parts of the BA, he’s still just flat out wrong and prices are well above their 2002 prices.

I think the bubble would have popped MUCH earlier had the government not heavily intervened in the market. By all rights it shouldn't have taken 5 years. He simply called it as being a bubble, and he was right.