Thursday, August 26, 2010

The So-Called "Housing Crisis"

An NPR story today states that: "Many people can't afford to sell their homes; as many as one-third of homeowners owe more than their home is now worth, and there are few buyers. Americans who once expected mobility now find themselves grounded, with their careers and lives fixed in place. They can't move to better job markets without taking a huge financial hit."

This dorp in home prices has been painted by many as a "crisis", when in reality it is simply a normal and expected adjustment to abnormally high rises in prices during the past decade. The proof of this lies in an amazing chart contained in the following website:

This site has a chart which shows that the rise in prices since 1890 closely parallels the inflation rate: i.e., there has been little or no rise in the real price of a home. Instead, the rise has been due to inflation, and people have conned themselves into believing that their homes have actually risen in price, due to a lack of understanding of inflation. The chart in question shows that the real value of homes has been in the neighborhood of 100 ever since 1890, until about 2005, when there is a *huge* spike in prices raising them to about 200!!

The drop-off since then has brought prices down to about 125, which is still a bit higher than at any time in the period of 1890-2000. The conclusion is that prices are still high and will fall further to get into line with historic trends.

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