I stumbled across this version of Robert Shiller’s famous inflation adjusted home price index, and it provides a really great visual for what’s going on with home prices right now. The red line shows the price level we’re at now. You can see clearly that home prices nationally are still higher than ever before in history despite a 30% fall from the peak of the bubble. You don’t need to understand the math or any complicated economics in order to imagine the trajectory here will continue to head south for a while.
For those of us watching the California real estate market, there are two things to keep in mind looking at this chart. For one thing, the chart is tracking the national market. California is a much more extreme case than that represented by national statistics. It was pretty much at the epicenter of bubble price distortion and held out longer than most of the country before beginning its drop back to earth, especially in Los Angeles. So it has farther to go and will take longer to do it. Los Angeles and other west coast cities in the state are still considered to be some of the most overpriced cities in the country and therefore face a more dramatic correction ahead than most of the rest of the country.
Another thing to keep in mind is that bubbles always overshoot to the downside before reaching stability. This is evident when looking at the history of market bubbles. There is never the “soft landing” we heard so much about in the press when we were first beginning our descent. (Don’t hear much about that anymore, eh?! I guess Depression era unemployment numbers and the threat of a total banking system meltdown blew that one out of the water.) I wouldn’t be surprised to see housing undervalued before this is all played out, especially in California.
“The harder they come the harder they fall, one and all”
– Jimmy Cliff
From: Pragmatic Capitalism
U.S. HOUSING PRICES STILL MORE EXPENSIVE THAN ANY POINT IN LAST 120 YEARS
June 14, 2010