Thursday, March 30, 2006

US housing prices in historical perspective

The Economist's View features this look at a paper by Irrational Exuberance author Robert Shiller. Shiller has constructed a series of data on US housing prices going back to 1890. The resulting graph clearly shows that something out of the ordinary is going on with current US housing prices:

As you might imagine from looking at the chart, Shiller is not very convinced by those who argue that the fundamentals of the housing market are sound, and that, therefore, prices are either not in a bubble, or that they will decline in a slow crash or soft landing. Neither, however, is Shiller convinced that a sharp collapse of housing prices, and with them the US economy, is inevitable. The risk is certainly there, he says, but he seems cautiously optimistic that new risk-management tools, such as the Chicago Mercantile Exchange's upcoming futures market for real estate, will help manage the pain of a popping or deflating bubble.

1 comment:

christian_left said...

Interesting post. I have long been a pessimist on the housing bubble, and I still hold to that view even though the slowdown has yet to become a serious crash. This chart nicely sums up the problem, which seems historically unprecedented to me. I suppose it is possible that housing prices could stabilize at some much higher level as a proportion of income, but it is numerically impossible for prices to keep rising at the rates of the past 10 years. Even if people come to expect a much higher equlibrium for housing as a part of the cost of living, I fear for the social consequences of that given how many working poor families are financially strapped right now and having to run up huge debts just to make ends meet. Providing health care would help some, since that is the other major category of rapidly escalating family budget expenditure. But housing is becoming such a huge fraction of family expenses, especially in markets where jobs are most available, that I would still be concerned.

Interestingly, I am about the take a housing tour with a realtor this afternoon in a town in the American West where I am interviewing for a job. People say that prices here have gone up a lot recently. It will be interesting to get a local perspective on the problem.