Chart Of The Day: The Housing Bubble Has Not Fully Deflated

Daniel Indiviglio at The Atlantic comments on this chart of housing prices going all the way back to 1890:

This is a pretty fascinating picture. First, it shows just how incredibly absurd the housing boom was. Beginning in the 1940s, inflation-adjusted homes prices have settled around the 110 value according to the Case-Shiller index. Yet, the index value exceeded 200 in 2006. Prices began a descent when housing collapsed, but as of May the index remained well above the natural value of 110.

Eyeing the chart, the value looks to have hit around 147 in May. For it to drop back down to 110, home prices would have to decline another 25%. That’s still a pretty long way to fall.

Indeed, and as Indiviglio notes the drop need not be an actual drop in price of 25% since inflation, along with stable housing prices, would help to bring the real cost of housing back down to historic levels. What this chart does show us, though, is that the housing market that existed from the late 1990s until 2007/08 was an historical anomaly, and anyone expecting a return to those days is fooling themselves.

FILED UNDER: Doug Mataconis, Economics and Business, Quick Picks
Doug Mataconis
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Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook


  1. john personna says:

    That red dotted line is the worst kind of BS.  Wost because while it has no rational basis, it has great emotional and irrational appeal.  The mind loves symmetric images, and the red dots provide them.
    This line does not fix the irrationality of the graph:

    Indeed, and as Indiviglio notes the drop need not be an actual drop in price of 25% since inflation, along with stable housing prices, would help to bring the real cost of housing back down to historic levels.

    Simply no.  The prices in coming years will be set by the expectations, rational and irrational, of buyers and sells going forward.  We have no way of knowing what those are.
    What I see when I looking at that graph is that the market tends to find stability and it them for a few decades, before a sometimes dangerous transition to a new level.
    That said, I’d expect the new level to be below current prices.  How much lower, I would not hazard to draw little red dots.


  2. john personna says:

    I wish I had an edit button, but you all can probably figure it out.  f u cn rd ths u cn rd jp.


  3. James says:

    Deflation: Humm I think Deflation is still with us. Est. 3 to 5 yrs? 🙂


  4. PD Shaw says:

    I agree with john persona, HUMBUG on the red line, though prices may still drop.

    I think this chart has to be looked at though, which breaks down the C-S index:


  5. Dave Schuler says:

    I think this is a misreading of the chart.  What I see in the chart is that, starting after WWII, we’ve seen a series of peaks and troughs, the top of each peak and the valley of each trough higher than the last.  Not a lot higher but a little higher.  Reading the chart as showing great stability over the period of the last sixty years doesn’t really appear to tell the whole story.


    Now I agree that a great bubble has developed over the last decade.  Where I don’t agree is where the bottom of the trough will be.  As I see it there are several questions


    1) why wasn’t there a peak in the 1960s?

    2) where will the present trough find bottom?

    3) will the trend that came in with the Baby Boomers go out with them as well?


  6. Drew says:

    I agree, jp and pd, that the red dots give a sense of false precision, but I’m not sure the violent guffaw is warranted.  We had a bubble, we are reverting to some more fundamental long term mean.  The red dots might not be that far off. Its not unheard of.  Equity market valuations ebb and flow as well (See: the late 90’s), but there are long term cap rates that ultimately find their way into valuations.  

    We can all speculate about the cause of the run-up, but as I have pointed out before, if you find a sufficiently granular version of the index you will see that in Q3 of 1996 the index took off.  You might say that Q396 was the last quarter of random movement.  OK, so Q496.  But there is a clear inflection point in that time frame, and one ought to focus on that to get an understanding of what set this off.