Real house prices back to 2003 levels

Justin, I'm curious. I suspect that the 20-city composite include the bubble cities of Miami, Phoenix, and Las Vegas. These might correctly be considered outliers (or not, depending on what you're trying to show). But if you remove the obvious bubble cities, what does Case-Shiller say?

Justin,

I think one could argue that housing prices have a bit further to run on those stats.

When we reach 2001-02 levels, where we had our market crash as you aptly noted yesterday, would it be fair to expect a firming and leveling of the housing market....all things being equal (i.e. foreclosure rates, credit stabilizes, employment numbers firm).???

All 20 areas in the Case-Shiller index is down YOY, the bubble cities however are down far more than other cities.

http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_082653.pdf

The official numbers are not adjusted for inflation, so these are the nominal drops in value.

@Curmudgeon

The 20 cities are: Phoenix, LA, San Diego, San Francisco, Denver, Washington DC, Miami, Tampa, Atlanta, Chicago, Boston, Detroit, Minneapolis, Charlotte, Las Vegas, New York, Cleveland, Portland, Dallas, Seattle.

Might the outliers to remove include those that have been hit by not just the real estate bubble (Phoenix, Miami, etc) but those whose hit due to severe economic turn-down (large factory closings, etc) such as Detroit and/or Cleveland?

Forgive me if its a silly question. Not an economic major here - spent my time with test tubes and microscopes.

Touche, cosanostra. If you throw in Tampa, that makes six cities. It's difficult to characterize them as outliers, even though Detroit and Cleveland were never bubbles.

Bryan, I think just as we've overshot the long term trend line (whatever that means) over the last several years may well mean that we may next oscillate back to well below that line before we once again reach equilibrium. In other words, don't look at 2001-02 as a floor.

Touche, cosanostra. If you throw in Tampa, that makes six cities. It's difficult to characterize them as outliers, even though Detroit and Cleveland were never bubbles.

@Curmudgeon

Okay, so we're kinda screwed.

What's the long run growth average for housing prices? Something like 1% annually (i.e. population growth to reflect that we're making more people but not more land) over inflation? So, in real terms, population growth. Is that right (I forget off the top of my head)? It'd be nice to see the above graph with where things are and where they might have been without the bubble. It's an overly simplistic idea to argue that the bubble is righted when the long run trend and actual converge, but it is a guide.

@Curmudgeon

The data would be interesting if the bubbles were removed, I was just wondering about considering an outlier as one besides a real estate bubble locale. Of course with only 20 cities, pretty soon you're only looking at 5 pieces of data and the conclusions aren't going to be very robust.

Curmudgeon says 'Bryan, I think just as we've overshot the long term trend line (whatever that means) over the last several years may well mean that we may next oscillate back to well below that line before we once again reach equilibrium.'

Excellent point. I'd say you are correct and we're likely to see a floor lower than 2001-02. Guessing the actual floor will difficult as the indices only go back to 1987, before that one would have to compile that data themselves I believe.

Something like 1% annually (i.e. population growth to reflect that we're making more people but not more land) over inflation?

Housing had been beating inflation because wages have historically beat inflation. Since 2000, wages are pretty much flat after CPI my assumption is that homes in inflation adjusted prices should be around the year 2000 prices. Maybe a bit higher or lower depending on the relative interest rates.

My theory is based upon the way people buy things on credit. They look at their monthly income, then look at the monthly payment and see if they can afford it. Banks usually have done the same as well. If housing prices start to outpace wage growth, then it's time to look for a reason that may be. In this case it was the easy availability of credit, low short-term interest rates and negative amortizing loans made the short-term monthly payment affordable.

"Housing had been beating inflation because wages have historically beat inflation. Since 2000, wages are pretty much flat after CPI my assumption is that homes in inflation adjusted prices should be around the year 2000 prices. Maybe a bit higher or lower depending on the relative interest rates."

Sounds reasonable, but how likely is it to overshoot below the trendline by about the same amount as it exceeded it on the upside? It seems to me that there may be no way to "damp" that overshoot. The government could try by printing more money, but this, in turn, would add to inflation which should result in higher interest rates, thus exacerbating the very problem it's trying to prevent. Another solution might be to increase demand by encouraging more immigration into hard-hit areas. Maybe we should sell now! Thoughts?

To get a broad picture of the entire United States median house prices adjusted for inflation, Robert J. Shiller, a professor of Economics at Yale University, has researched the median home prices over the past century. Here is an article and graph that sheds some light on the housing situation: Median Home Prices Inflation Adjusted