Thinking About Money

Over the past few days I’ve discussed Housing Cycles and Housing Bubbles. But a picture is worth a thousand words, so here’s you chance to see if your interpretation of the numbers matches mine.

The first graph shows housing prices adjusted for inflation. As you can see, housing prices do increase over time, but not as much as people think. That $114,649 house in 1963 (that’s adjusted for inflation to 2005 dollars) growing to $240,900 in 2005 represents a return of 1.87%. The two colored lines are my own to roughly show the locations of highs and lows in the cycle.

The population growth graph shows U.S. population growth in millions. As you can see, we actually have been having a bit of a population boom in recent years.

The Housing Starts table shows the number of housing starts each year.

Finally, here is a graph of interest rates. Note that the date range on this one is different.

It’s hard to draw any firm conclusions on the relationships between housing prices and the other factors. But it is possible to formulate some pretty convincing theories.

Historic interest rates do remain low even with recent increases – especially for 30 year fixed mortgages. Those who purchased homes using ARM’s and other mortgages based on short term rates are going to be in trouble soon – but it’s not too late to capture decent long term rates. Also, it’s fairly clear that with the possible exception of the extraordinarily high rates of 1980-1984, and extraordinarily low rates recently, interest rates alone do not seem to have an overwhelming impact on housing prices. Note particularly the interest rate spike of 1989-1992 that corresponds to an increase of housing prices. How could this be? Perhaps due to an increasing population combined with a drop in housing starts during that period (supply and demand)?

In terms of the current situation, a combination of high prices, a large number of housing starts, and a relatively steady population increase all suggest that we are at or passing a peak in the housing cycle. But barring some unusual circumstance, we are not looking at a true bubble. The lower trend line is almost certainly supported by long term population growth – people will continue to need to live somewhere.

So what can we expect? Again, barring any major surprises, housing prices are going to go down. How far? A bit of extrapolating suggests that housing prices will head downward for 3 or 4 years, reaching their 2003 levels – about a 20% drop from their peak. They will then increase at under 2%/year (above then current inflation rates) until the next sudden spike in prices.

Keep in mind we’re talking national averages here. Some rapidly growing areas will have much greater increases (and probably correspondingly greater busts). Areas with decreasing population will possibly see permanent decreases in housing prices. Real estate prices, like most everything to do with real estate, is very much about local conditions.

By the way, another funny thing I discovered along the way: monthly rents have remained constant (corrected for inflation) since 1970. Good news for renters (at least those whose income keeps up with inflation), and those who are investors who can expect their passive income to hold its value.

Sources:

Housing prices:
http://www.huduser.org/periodicals/ushmc/spring06/USHMC_06Q1_ch4.pdf

Housing Starts:
http://www.forecasts.org/data/data/HOUST.htm

Population statistics:
http://www.census.gov/

Inflation rates:
http://oregonstate.edu/dept/pol_sci/fac/sahr/sahr.htm#_Conversion_Factor_Tables

This entry was posted on Sunday, July 2nd, 2006 at 12:41 pm and is filed under Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.