Thursday, May 6, 2010

Housing Bubble

From about 2004~2009 a number of people and blogger's surfaced foretelling of a massive housing bubble. At the time popular opinion was that housing prices NEVER go down and that houses where an investment vehicle with no downside because unlike stock they always have value and will never be worth $0.

Those claiming the housing market was in a bubble that would eventually come crashing down used the following two examples to demonstrate their point.

This was produced using Shiller of the Case-Shiller index, an authority in tracking housing. The following shows that since World War II housing prices adjusted for inflation have floated around 110% of the 1890 value. While prices have spiked up from time to time they always come back down to the 110% level. At the time I originally saw this it 2005 it had not yet come down, but the poster believed it was in for a large shift downward. Currently the poster is using it to indicate when they feel the housing market will finally level off, and prices will stop declining somewhere around 2013~2014.

This is another graph, in blue is the median home price in the US in actual dollars. The red line is the same value only adjusted for inflation. The thin blue and thin red lines are what the poster believes is the normal trajectory of home prices which it follows very closely until 2000. The poster believes the prices still have a little bit farther to fall before they line up with their normal trajectory and can begin to increase modestly like the previously did before the bubble.

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