Last summer I shared a graph of American home values from 1890 to present. I found it alarming:
![[Home prices have risen more sharply in the past ten years than at any other time since 1890.]](http://www.getrichslowly.org/images/homepricesL.gif "Headed for a fall?")
Click image to view larger version in a new window. Graph © NYT.
This graph was taken from a New York Times article entitled “Read Between All Those For Sale Signs” [reg. required] by David Leonhardt and Vikas Bajaj. Now the folks at Speculative Bubble have decided to dramatize this graph by — what else? — plotting it inside the game Roller Coaster Tycoon.
This video is scary, especially for those of who us who have purchased homes in the past few years, but I continue to take comfort in the fact that other graphs of the bubble aren’t quite so alarming.
Still, if I lived in an apartment right now, I wouldn’t be in any rush to buy a home.
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Excellent timing on this article, considering I close on my new house next week… sigh.
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I am currently a renter. In fact, I’ve always been a renter. I though, after graduating with a nice graduate degree from Yale, getting a great job, getting married, I’d be in line for buying a house. Wrong!
I got hit with a spell of unemployment and debt mounted. We’re digging our way out of that debt, but the fact is that we’re priced out of the market at this point.
Unless there is a drastic reduction in home prices, I’m never going to be owning a my own home. Renting it is. I’ve been watching the signs and even if I could afford a house at this point, I wouldn’t buy one.
On a related note, my neighbor fancies himself a “developer”. He bought a property nearby and built a “monster house” on it. No takers at his $850,000+ price tag. He should have seen the writing on the wall and not risked his families future on it. Oh well.
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it’s AMAZING how the real estate bubble grew in 2004-2005.. i sort of regret not buying a home before that time
now that things have slowed down.. it’s going to take a miracle to afford a mortgage in california.. i still don’t know how people do it
i’m now in NO RUSH to buy a home.. i’ll continue to stay at home with mom rent free.. while she’s living comfortably sitting on her equity =D
it’s not easy being a 20 something these days
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It is all in how and where you buy. Right now, there are going to be deals than you can imagine. If you do not understand market cycles and not let panic drive your decisions- you will miss out.
I am buying my second home this year. Comps for my area are strong, I’m getting it under comps, this area is one of high growth and demand for housing, and I have the money to hold it.
Money is made in down markets- if you want a house, this is a tiem when opportunities abound if you know how to pull the deal together.
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I disagree. You should buy a house when you can afford it. Like investing in the stock market, trying to time the market is a fool’s errand. It’s very difficult.
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Would that graph be more useful if it were on a logarithmic scale?
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I think that chart is designed deceptively to envoke fear. And he is quiet sucessful in his creation of it. I love the books on specuative bubbles (Devil take the Hindmost is a great start), I won’t disagree we are in a speculative market now, however, that chart is the extreme bookend in this arguement. ‘figures lie and liars figure’.
The author of that chart does not control for economic growth, increase in wages and expansion of credit. The most damaging is the fact that this chart does not take into account any geographic factors!! Portland, Oregon was a timber town prior to 1985, with a popluation of a mere 380K.
There really is no need to look before that.
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The NY Times had an article a while back (I think it was last year) on renting versus owning, and they concluded that there were a number of situations in which renting made more economic sense. For example, if you’re not planning to stay put for at least five years (it can take that long to build up any serious equity in a home, since the interest is so heavily front-loaded in a mortgage), or if you’re in a very cheap apartment, renting might be the best bet.
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2 things:
To prlinkbiz: “If you do not understand market cycles…you will miss out.” Wow. Good luck to you in your market timing.
To JD: The other graph you posted should be equally alarming. It shows, mostly, a straight line on a log scale, indicating exponential growth, which is just what’s shown on the Times’ graph. If your investments were the data plotted on that graph, you’d be ecstatic.
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I am not even worried about the cyclical nature of the housing market. Right now buying a is out of reach for most single income households. For now I will keep renting and saving my money.
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I bought my place 15 months ago, since then, similar properties in my immediate neighborhood have sold for 20-28% more. My initial goal was to live there for 2 years give or take a few months and sell it, try to make 20% profit after realtor fees (friend is one so they are very minimal) and move into a bigger place, do the same. At the rate things are going, I may just stick around for 3 years total to make sure it doesn’t drop, I’m OK with it leveling out a bit, but too much of a rise creates a problem when I try to jump to the next level of house.
The other thing is interest rates. My mortgage company sent out an offer to me, open a checking account with a minimum balance of $10k and they would give me an interest rate of only 0.8% less then my mortgage. It’s almost break even at that point. I didn’t take them up on the offer, I’m sticking with ING for now, but its still crazy that they can do this.
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I remember hearing circa 1999 that the Dot.Com bubble was permanent as well…
To Vancouver Dave (#7): While true that the chart does not take into account economic growth and increase in wages, they have not changed radically enough in the last 3 years to merit such a rise in home prices. Also, this chart isn’t true everywhere in America: look at Detroit, for example.
What’s changed in the last three years? Sub-prime lending: credit, ARMs, 0-down deals. Heck, I was approved for a 0-down 6% ARM of $278k while making only 42k a year (this was 4 months ago). Thats about 60% of my take-home pay per month, and almost exactly double my current rent. It would only make sense to sign if the property value increased by about 7% per year for the next 4 years. But it won’t.
Why? The average couple can’t afford an average house. When prices increase faster than incomes, the number of potential buyers decreases. When empty-nesters sell their 3 bedroom houses, how many 20-something couples with a kid can afford the $350k+ price tag? (In Seattle, its more like $450k). The only way is if they sign a deal like the one described above. Otherwise, they’re going to rent a similar place for half that amount. And I can state with confidence that rents aren’t out of whack- housing prices are. And so, people like myself are hanging tight, limiting demand.
Lenders are getting burned from making sub-prime loans- people can’t keep up the payments. Foreclosures go up, the bank loses money (like New Century Financial). Since they’re cutting back on sub-prime lending now, fewer people can afford to buy, so demand is dropping.
Additionally, many cities (like mine, Seattle) have experienced a condo boom, bringing thousands of condo-conversions and new buildings on the sites of former single-family homes. These add to the supply.
And when demand goes down and supply goes up…
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Real estate market is long overdue for a correction. I’m looking forward to seeing the fur fly. Some real nasty overpriced junk built toward the end of the boom.
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The “other graph” is on a log scale and is only of the past 30 years. It’s just as scary. Well, scary for others… Since I’m a renter with a savings account, it’s actually quite nice.
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“The author of that chart does not control for economic growth, increase in wages and expansion of credit.”
Wrong. What do you think the New York Times is… the evening news? Read the caption, “It presents housing values in consistent terms over 116 years, factoring out the effects of inflation.”
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This graph may show the general US trend, but it isn’t indicative of every housing market, and I think it’s important to remember that. The area I live in (near the beach and a couple hot vacation spots) didn’t experience the initial growth until nearly 3 years after most of the country did. (We were lucky enough to purchase our first house in St. Paul, MN right before the boom, sell it at the peak, and purchase another here in coastal NC right before the prices went up here.) Right now, we are looking at relocating and finding that our house is worth quite a bit more than houses in many many other cities.
I have no doubt that between condos, unreachable prices, and developers gone mad (why keep building when you can’t sell what you’ve got?) prices will not continue to rise, and most likely will decline. But another thing to consider, and the reason I don’t think there will be a huge drop, is that our population is also growing fast, and there will always be a percentage looking for a house rather than renting. We also see in our society a belief in many young people that they have to live like their parents live – even though their parents have at least a 20 year head start – so we will see many young people purchasing homes (and hopefully they can actually afford it.)
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I do think it’s amazing that they had to show a chart from 1890 to the present to show any sort of volatility. The fact is that real estate is not very volatile. It’s very slow moving due to the fact that it’s so illiquid. All you have to do is look at a stock chart for the last 5 years instead of over a hundred years and you’ll see even more ups and downs.
-limeade
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Let me ditto those who have said that a lot depends on where you live. Here in Northwest Indiana, we don’t have the crazy bubble issues that the big coastal cities do. House prices have gone up, but not ridiculously.
Now my sister & bro-in-law who just sold their condo in Boston, on the other hand… They made out like bandits! I don’t remember the details, but it doubled or tripled in value from when they bought it 9 years ago. Wow.
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Just reinforcing Andy’s comment on the second graph. It’s on a logarithmic scale. This kind of scale makes things like compound interest look linear. Scaring, isn’t it?
Keep up the great work, but be very careful with graphics. It’s easy to misread them, and people will make it so on purpose.
By the way, the values are a lot less scary if you’d compare to gold or other currencies. But that is just taking into account that the dollar has reduced its value in the last decade.
What keeps the bubble up is really the massive availability of money to lend to home buyers (we have the same in my country – Portugal, Europe). Here, the rates are still increasing and a lot of people are having trouble paying their houses. If the defaults go too high, banks will reduce the available lending money and the bubble bursting won’t be pretty.
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Okay, so now to go over why the graph is more alarming that it actually is.
1) The authors did control for inflation. That’s good, we now have “real” values
2) Homes have gotten bigger over the time of this chart. We do not have a “price per sq foot by year” in this chart. This would represent a qualitative increase, and would not be reflected in the first analysis.
There are many other qualitative improvements that would raise home prices, and we’re not capturing their value either.
So just be careful when a simple graph is used to explain a very tough concept. I’ve seen graphs with said qualitative instruments included, and there’s still a bubble
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@DC Economist
*sigh* I wish the size of homes weren’t getting so big. They’ve ruined a charming old neighborhood in my town tearing down charming, decently sized old houses and building McMansions (or worse, duplexes that look like McMansions). I understand from a textbook perspective how this is an “improvement”, but it’s ruined the charm of the place (not to mention grossly inflated property values beyond affordability) and now I just want to leave the area.
If only I didn’t fear I’d find the same wherever I landed.
Sorry, I’m not sure quite how this adds to the discussion of the graph, which I’ve sidestepped simply because interpreting graphs isn’t my talent.
DB
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Thank goodness we can’t afford to buy right now. It will take us another 3-5 years to save up and for me to finish school before we’re ready. Hopefully by then things won’t look so bad. I’m scared of heights
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[...] http://www.getrichslowly.org/blog/2007/04/06/the-real-estate-roller-coaster-literally/ Last summer I shared a graph of American home values from 1890 to present. I found it alarming: Click image to view larger version in a new window. Graph © NYT. This graph was taken from a New York Times article entitled “Read Between All Those For Sale Signs” [reg. required] by David Leonhardt and Vikas Bajaj. Now the folks at Speculative Bubble have decided to dramatize this graph by — what else? — plotting it inside the game Roller Coaster Tycoon. [...]
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Hey now, don’t scare everyone who is currently renting to not buy a house.
There are some areas that the “bubble busting” doesn’t impact quite as much. Plus, there are some good deals to be had right now. As with anything, do your homework before you pull the trigger.
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This is actually very simple: The housing market has always been a “pyramid”: There is a large stock of entry-level houses, fewer mid-level houses, and a very few high-end houses.
First-time buyers enter on the lower end of the pyramid. Over time, they earn more and will work their way into the mid-tier (using some of the “forced” savings of the equity they’ve accrued in their house), and so on.
What is wrong right now is that in many markets, the entry level has gone away. There was an article in the PI here in Seattle last week demonstrating that: not even in the condo market was the median price affordable for the median wage earner in town.
That’s unsustainable. I make $100K a year, more or less. If I have $80K to put down, by conventional metrics I can afford to buy a $400K house. $100K is a very good living, almost twice the median income in Seattle, and yet it wouldn’t get me a whole lot here.
Square footage is irrelevant. Really. Who cares if the more expensive house you cannot afford is partially that because it’s larger? You’re still priced out of the market. Size is a gimmick to sell suckers on a higher price.
What has fueled speculation is this stupid idea of holding for 1 year and making 50%. That’s been true in certain markets but it’s idiotic to take that as a given.
I heard all of this same crud when logging into investment boards in 2000, how the internet tech stock boom was a new paradigm and what we had then was a new baseline.
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“*sigh* I wish the size of homes weren’t getting so big. They’ve ruined a charming old neighborhood in my town tearing down charming, decently sized old houses and building McMansions (or worse, duplexes that look like McMansions).”
I share your feelings 185%. The houses of yesterday had interest, beauty, and charm that has been entirely lost in modern house design.
I find today’s houses appallingly overblown and ugly… it seems that everything is more oriented toward JUST the convenience of the builder, and how much money the builder will extract from the unfortunate buyer.
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ugh, you old house people. old houses *were* tiny. you people with your *charming old houses*, those were the McMansions of their day. everybody else lived in a tiny house.
and those tiny houses didn’t have dining rooms, enough bedrooms, comfortable bathrooms, or anything else that people need.
not that i’m for McMansions, but please quit complaining that your old mcmansion is somehow superior, just because its old.
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I bought a house in 1979 for $67K. I sold it in 1987 for $184K. I did nothing to improve the home other then normal maintenance. It remained the same home it was when I bought it. I bought a condo in 1984 for $120k and sold in 1989 for $96k, again the graph is wrong. I live in NJ, so maybe this represents some other part of the country, but it looks like BS to me.
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[...] This historical housing chart has been making the rounds of the net. I have seen it at Bigger Pockets and Get Rich Slowly. [...]
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[...] thing to consider is that home prices in the United States are just now beginning to correct from an enormous unprecedented run-up in recent years. Despite what those in the business of selling real estate may insist, the correction in housing is [...]
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[...] thing to consider is that home prices in the United States are just now beginning to correct from an enormous unprecedented run-up in recent years. Despite what those in the business of selling real estate may insist, the correction in housing is [...]
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I really don’t get an important fact in this
“Housing Bubble”…
Banks loan you money to buy a house.
Then, you can’t make the payments.
I doubt much of the home principle value had
been paid for at that point, by the borrower.
But on average, a few payments would be a lot.
So now, the bank gets to repossess the house.
Perhaps fix it up a bit, sell it again!
Stick those previous payments in their pocket.
The only way’s I see to NOT make money, is to
be totally incompetent, or embezzlement.
$Price of House + $Points to Realtor and various…
That would be the banks investment, correct?
$Home value + $payments received, after foreclosure?
In the immediate past housing market,
With the equity shooting through the roof,
How did Banks manage to lose anything?
Anything of substance you buy and use, depreciates
in value. Except a house or property?
I was fascinated watching the “Equity Suckers” over
the past couple of decades. Flipping houses.
No compassion for the misfortune of the previous
owner that generated their sweet deal,
and no conscience when selling it for more,
just because they “owned” it for a while on paper.
Our current housing crisis is due to those millions
of real estate dabblers, who just happen to have
the same predatory greedy motives.
Besides, it’s legal. It being legal has been their recent
battle cry. Morality and Morals are trumped by cash.
I predict that the $199.000 will go for about half
of the gains since the 80′s. About $150,000, before
“they” can start artificially inflating prices again.
And they will, post haste.
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