Yesterday Jason Kottke linked to a graph of American home values from 1890 to present. It’s shocking. It’s one thing to hear that the U.S. is in the midst of a housing bubble, but it’s another thing to see a visual representation. Adjusted for inflation, homes are currently selling for about twice their historical value.

[Home prices have risen more sharply in the past ten years than at any other time since 1890.]
Click image to view larger version in a new window. Graph © NYT.

This graph is from a recent New York Times article entitled “Read Between All Those For Sale Signs” [reg. required] by David Leonhardt and Vikas Bajaj. The authors write:

Jumps of this magnitude have little precedent. To afford homes, some buyers, especially in California, have resorted to aggressive mortgages, like those that allow artificially low payments in the early years. In effect, families seem to be buying houses they cannot afford, in the hope that their incomes or property values will rise significantly.

This scares me. This is gambling. And in the short term at least, it seems likely that home values will fall. If they fall, who can say how long it take for them to regain their value? But I believe that few people blindly purchase a new house. It’s the largest financial decision most of us will ever make; I believe most people consider their situation carefully before making a purchase. The article offers further consolation.

[T]he boom in house prices was largely a result of the appeal of “superstar cities” like New York and San Francisco that are unlikely to lose their allure. In much of the rest of the country, prices are not unusually high, considering the relatively low interest rates.

The bubble seems to be bursting here in Portland. Though prices rose in the first half of 2006, I’ve begun to notice signs of a slow-down. More homes are for sale, and they’re on the market longer. There are more “price reduced” signs. Prices are certainly still high, and I doubt they’re actually dropping yet in Oregon, but the period of rapid appreciation seems to be over.

I’ll admit to being a little nervous about home prices. We bought our first home for $112,000 in 1994. We sold it for $160,000 in 2004 and bought this house, a hundred-year-old farmhouse for which we paid $282,000. We don’t intend to move anytime soon (or ever, actually), so in theory a volatile real estate market will have no effect on our personal finances. But it still makes me nervous.

There’s some comfort in the fact that other graphs of the bubble are not quite so alarming.

Ultimately, homebuyers should be guided by sound financial principles:

  • Determine whether it makes more sense to rent or to buy.
  • Don’t buy more home than you can afford.
  • Seek professional advice, if possible
  • Get a home inspection. This is one of the best $400 you’ll ever spend.
  • If you use a real-estate agent, make sure she is working for you and not for the seller.
  • Choose a sensible mortgage. (Please don’t go for one of those fifty-year monstrosities.)

Even the experts can’t agree on what’s going to happen. There are too many factors involved, not the least of which is the psychology of the American homebuyer.

For more on this subject, check out The Housing Bubble Blog.

[New York Times: "Read Between All Those For Sale Signs" — registration required]

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