Last time, you will recall I looked at whether recent trends in prices could indicate future price trends. We saw that, in general, an established trend will persist for another nine to 12 months unless “something” happens. This time, let’s look at prices over the very long term and see if there are any interesting points of inflection worth investigating further.

I took the Federal Housing Finance Administration data I used last time and smoothed the bumps out with a rolling four-quarter average. I also adjusted for overall price inflation. We want to look at real price changes, not ones caused by changes in money’s purchasing power.

The first chart looks at the period from 1977 through 2000. Believe it or not, inflation-adjusted prices were actually trending gradually down the whole time! By the time the absolute low was hit in 1997, real prices had decreased by 21 percent – roughly one percent per year. (Although the prices paid for homes more than doubled in that period, consumer prices more than tripled. So the inflation adjusted change was negative.)

Now look at chart two, covering 1995 to the present. As I said above, we got our first inflection point during 1997. Prices started moving upward briskly – first at a trot and then at a sprint. By the time that sprint – also known as “the bubble” – ended in late 2006, inflation-adjusted real estate prices had increased by 143 percent. On a compound annual basis, that’s 10 percent per year.

From that obvious inflection point, a precipitous decline ensued. By its end in early 2012, inflation-adjusted prices had dropped by 53 percent – nearly erasing the entire 1997-2006 gain.

And then, from that inflection point, another uptrend that continues to this day. Prices in real terms are up by 58 percent – 8 percent compounded annually. So, while it is not quite a sprint, it is definitely different from the 1977-1997 experience.

What caused the three inflection points we have had in the last 20 years? Will prices just go flat again like 1977-97, or might another inflection point and correction be at hand? Tune in next time.

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