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Economic Commentary

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Housing's Big Picture Isn't Pretty

Fri, May 22 2009, 15:08 GMT
by John Browne

Euro Pacific Capital, Inc.

While economists and real estate investors "celebrate" the slight deceleration in the pace of home price declines in the recent data, a quick look at home price trajectories over the past 100 and 50 years reveals little to cheer about and much to be feared.

More significant than small month-to-month changes is the flow of home price patterns over decades. In his book Irrational Exuberance, Robert Shiller determined that in the 100 years between 1900 and 2000, home prices in the U.S. increased by an average of about 3.4% per year. These figures have not been adjusted for inflation. If they had, home prices would have outpaced inflation by only the slimmest of margins.

This 100-year period includes the Great Depression, when home prices sank significantly, and it also involves decades in which our current home mortgage infrastructure simply did not exist. The second half of the century, with its baby boom, heightened inflation, suburban expansion and institutionalized mortgage apparatus, was much kinder to home prices. Even so, in the 50 boom years between 1950 and 2000, home prices increased an average of 4.4% per year. Even this pace barely beat inflation.

By all accounts, the home price boom that began in late 1997 (when the high of the previous 1989 peak was finally eclipsed) and topped out in June 2006 was extraordinary. The Case-Shiller 10-City Index, an amalgam of the home price trends in 10 of the largest U.S. cities, gained on average 19.4% per year during that time. The movements had very little to do with market fundamentals and everything to do with distortive government policies, a national mania for real estate wealth and a torrent of temporarily easy credit.

If we assume that the bubble was artificial, we can instead imagine that home prices should have followed the more typical path during that time. When you do these extrapolations, a very sobering picture emerges.

Published on  Thu, May 28 2009, 07:20 GMT