Real, Inflation-Adjusted, Housing Prices Since 1900
|Inflation-Adjusted U.S. Home Prices Since 1900|
Above is a graph (click to enlarge) reflecting inflation-adjusted prices for residential housing in the United States since 1900. The graph is based on Robert Shiller's housing price index, which I have summarized to yearly data. His index attempts to
estimate the change in price over time for a home of constant size and quality, when expressed in constant dollars. For example, suppose a particular two-bedroom, two bath home sold for $198,000 in 2006 (when the chart peaks at 198.0), measured in 2006 dollars. We can then estimate that, priced in 2006 dollars, an equivalent home would have sold for $101,600 in 1900, and $68,500 in 1942.
The graph seems to wander along trendlessly, with a few significant exceptions: The sharp drop that began in 1916; the sharp rise that began in 1942; and the sharp rise and fall that began in 1996/1997.
Housing Prices During the Post World War I EraThe sharp decline in real prices after the 1916 peak was at least partially the result of World War I, and the Spanish Flu Pandemic.
World War I lasted from 1914-1918. Over 100,000 Americans died in the war, and over 200,000 more were wounded.
The Spanish Flu struck in 1918. Estimates are that 550 million people (close to 1/3 of the world's population at the time!) caught this disease. Somewhere between 50 and 100 million died (3-6% of the world's population). In the U.S., about 28% of the population caught the flu, and 500,000 to 675,000 died.
In both cases, casualties were disproportionally high among young adults -- the age group from which most new families and new homeowners come. The two events together likely put a significant crimp in new family formation for years, reducing demand for houses, and putting downward pressure on prices.
The Advent of Mass ProductionMaybe more importantly, mass production techniques were starting to deliver more efficient processes, and lower prices. One of the first mass produced items was the Ford Model T, introduced in 1908. Ford further improved efficiency and lowered costs by introducing the assembly line in 1913. Similar productivity and cost improvements occurred in the housing industry.
Housing Prices During World War IIGermany invaded Poland in the fall of 1939, and we entered the war in December of 1941. Housing prices started increasing the following year --probably in response to severe war-time shortages. During the war, many items were rationed, including meat, cheese, butter, gasoline, coffee, sugar, silk, nylon, and many other items. Some items were not available at all -- e.g., new cars & new appliances.
Housing Prices After World War IIBy the time the war ended in 1945, there was huge pent-up demand for virtually everything -- not only because of the war, but also because of the years and years of hard times that preceded it (i.e., the Great Depression). Perhaps the largest pent-up demand was for babies! The ensuing baby boom was a primary cause of the increased demand for housing.
The G.I. Bill was another major contributor to increased demand for housing. The bill provided government guaranteed low interest, no down payment loans. The impact of the pent-up demand and the millions of returning soldiers buying homes under the G.I. Bill resulted in the largest increase in home ownership rates in our country's history, and put upward pressure on prices. This more than offset the decrease in demand resulting from the loss of more than 400,000 American soldiers in the war (vs. about 100,000 in WWI).
The Great U.S. Housing BubbleThere is no clearly acknowledged single cause for the dramatic increase in housing prices that started in 1996/97. The most obvious and immediate causes were historically low interest rates, the growth of risky new mortgage products (such as ARMs), incredibly lax lending standards, and the new ability to securitize/bundle the resulting risky mortgages into packages that obscured the risk.
Many argue that those were, in turn, the unintended consequences of the deregulation of the banking industry that started in the 1980s, and new laws, policies and practices designed to encourage homeownership (such as the Community Reinvestment Act of 1977).
Housing prices finally peaked in 2006, the victim of unsustainable prices and rising interest rates. Rising interest rates increased monthly payments on many adjustable rate mortgages beyond the (primarily subprime) borrowers' ability to pay. Falling home prices reduced the market value of those homes below the remaining mortgage balance, and thus made it impossible to refinance those mortgages at lower fixed rates. The result was a rash of home foreclosures, the failure of many mortgage lenders, and dramatic write-downs in the value of many mortgage-backed securities. This so-called "subprime" mortgage crisis ultimately snowballed into the worst financial crisis in America since the Great Depression.
100-Year Inflation-Adjusted Housing Price Growth was Less Than 1%/YearSo, what's the result of over 100 years of ups and downs in the housing market? The bottom line, somewhat surprisingly, is that the average annual price increase for U.S. homes from 1900 to 2012 was only 0.1%/year after inflation! And, that includes the possibly one-of-a-kind increase in prices caused by the baby boom and G.I. Bill. [Nov '12 note: As I suspected would happen when I originally posted, home prices are now back down in the 100-120 range. That's usually what happens with bubbles....]
Note: This doesn't necessarily mean that residential real estate is a lousy investment; it is, after all, keeping up with inflation. It does, though, remind us that housing is more complicated to analyze than you might expect. We'll continue the analysis in a later post.
Related Posts100 Years of (nominal) Housing Prices: Same prices, but not adjusted for inflation.
100 Years of U.S. Inflation History: includes an overview of the impact of inflation on housing.
Planning to Buy a House Spreadsheet: Downloadable Excel spreadsheet for prospective homeowners.
Planning to Buy a House discusses additional strategies for becoming a successful homeowner.
Comparing Housing and Stock Market Growth: identifies some factors that tend to constrain housing growth.
Housing vs Stock Market Growth Revisited: provides a fairer comparison
Robert Shiller "Irrational Exuberance" Housing Data: Shiller's inflation-adjusted housing price index data summarized to yearly data beginning in 1900.
History of the United States (1918-1945): especially re WWII and rationing.
World War I casualties
Spanish Flu: more on the 1918 flu pandemic.
Henry Ford: re Henry Ford and the Ford Motor Company
World War II casualties
G.I. Bill: more on the Servicemen's Readjustment Act of 1944, & loans to buy homes.
A Century of Home Ownership Rates 1900 to 2008
Causes of the United States housing bubble: nice, thorough job.
Subprime mortgage crisis another good analysis.
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Copyright © 2011. Last modified: 11/26/12