Robert Shiller's famous Inflation-Adjusted, Home Valuation Analysis remains a powerful tool for evaluating housing prices from a historical context. 

Shiller calculated U.S. home values going back to 1890 and confirmed the intuitive logic that house prices rise at approximately the rate of inflation over time.

Looking at a chart of Shiller's data it is difficult to understand how so many people disregarded logic, reason and the lessons of history to purchase wildly overvalued assets during the Housing Bubble. 

I accept that some people believed that "this time was different" because for a while it was.  For a short period of time financing conditions unique to the Housing Bubble made price largely irrelevant when calculating the traditional costs of homeownership.  Other buyers were momentum investors.  Some got caught up in the excitement of the mania.  Others valued homeownership above the historic housing premium.  Throw in a healthy dose of fraud and there were more than enough people willing to ignore history's wisdom. 




Lessons from 120 Years of Housing History

• The data illustrates the relative magnitude of the Housing Bubble
  • In a short period of time housing prices almost doubled in real terms and peaked at approximately twice the long-term sustainable value
  • The Housing Bubble's zenith was 202.8 compared to the previous record of 127.5 in 1989

• The chart clearly establishes the origin of the housing price distortion to be 1997

• Objectively, the dramatic Crash has been as spectacular as was the Mania

• The Obama Mini Housing Bubble hardly registers relative to the scale of the Housing Bubble and real prices have already fallen below those which preceded the brief, orchestrated price distortion

A Lesson Lost Within the Scale of the Housing Bubble

Otherwise credible people have been and continue to argue that housing prices are near bottom.  Millions of houses have been purchased since prices began to fall.  Some of these transactions were presumably executed based on expectations of future price appreciation or at least the belief that valuations were attractive. 

These perspectives are equally baffling as many of those which drove the Housing Bubble when evaluated historically.

With one exception in the last 120 years, each time housing prices approached an inflation-adjusted index value of 110, they have declined precipitously.  Today the real price index stands at 129.7.

That single exception was the Housing Bubble.  In 1997 prices had been declining for 8 years and would have continued to depreciate but for the Government's successful effort to manufacture 8 million new homeowners.

It occurred to me that current valuations might be obscured by the scale of recent events.  The steep collapse in real prices might also be interpreted as improving "value" by non-historians.

As such, I present a theoretical chart which ignores the Housing Bubble entirely.  Evaluating the current price level relative to pre-Bubble history provides a clear perspective on future prices.





Housing prices have never been more overvalued.  The 8 times that price levels approached or exceeded 110, valuations crashed.  During the last century, the current index reading of 129.7 would have been a bubble's peak, not its trough.

Given 120 years of data, and the conceptually appealing concept that housing prices should over the long term appreciate in-kind with inflation, what reasonable person would expect prices to maintain their current value?

Dismal Reality

Housing prices will fall below 110 based on the economic relationships which regulate value.  Given the worst housing market fundamentals since The Great Depression, it is entirely likely that prices will continue to decline beyond what would be considered historic fair value.

Buy a house if you must, but do so with the understanding that U.S. home prices will continue to fall.