Beware the Lone Chart

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Tyler Cowen reproduces a chart from Sober Look purporting to show that house prices are now above their 2005 peak. Several commenters on Tyler’s post are skeptical, and so am I.

Consider figure 2 in this piece by San Francisco Fed economists. It shows the price/rent ratio, and while it has gone up considerably since the trough, it is nowhere near back to the peak. Their figure also shows that mortgage indebtedness is not in a danger zone, either.

Look, if you want to suggest that house prices in San Francisco and Los Angeles are hard to justify, I won’t argue with you. But at the risk of saying something that could look stupid later this year, I will say that most of the country is not yet in a housing bubble.

7 thoughts on “Beware the Lone Chart”

  1. The chart isn’t even adjusted for inflation. CPI has gone up 24.2% from Jan 2005 to Jan 2016.

  2. Well I think this metric is correct. Remember, I believe this graph shows “nominal” housing prices. Granted, inflation has not been very high since 2005, but it has probably averaged around 2% per year. Compounded annually, this probably is about 24% over 11 years. This is about right. By the way, I’m a private equity professional who focuses on apartment properties, so I have a reasonably good feel for what housing and apartment prices are doing.

  3. Aren’t you a bit talking past each other? I’m not sure if Tyler is implying that “prices are above their 2005 peak” means that it’s a bubble. Couldn’t he be implying “so therefore most of the problems of underwater mortgages should be over and it shouldn’t be dragging down the economy– the real problem is average is over, etc.?”

  4. I think some of the commenters are on the right track, but the relevant period for the chart is 1991 through 2015. The increase per year in housing prices is 3.4%. The increase in CPI was 2.3% per year over the same period. So housing has gone up 1.1% over CPI over the period? I sold a house in 2013 that I bought in 1986 (in northern NJ, NY metro) and my appreciation over that time: 3.5% per year. Inflation: 2.6% per year. I believe that owner- occupied housing is an OK investment: it goes up a little more than inflation over the long run.

    Looks to me like housing prices are back to the (reasonable) long-term trend.

  5. We are back to a price after 10 years that a lot of people would like to have doubled.

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