Tuesday, February 24, 2009

How Robert Shiller measured housing prices back to 1890

The S&P/Case-Shiller Home Price Index only tracks housing prices back to 1987, and the OFHEO House Price Index only tracks housing prices back to 1975. This raises an interesting question: How the heck did Robert Shiller manage to measure home prices all the way back to 1890 in his famous graph?

Here's how he did it:
Until recently, the only long time series of house prices for the United States had been compiled by Shiller (2005). Shiller constructs this series by splining together available house price data from 1890–1934 from Grebler, Blank, and Winnick (1956), the home-purchase component of the CPI-U from 1953–1975, the OFHEO from 1975–1987, and the Case-Shiller-Weiss index from 1987–2005. To fill in the gap, Shiller constructs an index of house prices from 1934 to 1953 by compiling data on the sales price of houses from five major cities based on newspaper advertisements. These data, after adjusting for consumer price inflation, show almost no trend increase in house prices until about 1997, leading Shiller and others to conclude that the boom to house prices from 1998–2006 is historically anomalous.


  1. Looks like home prices need to fall another 30% or so to get back to the mean. If the credit crisis continues we can expect it to fall lower than that. Looks like we are trying to do a Japan with the bailouts. Japanese homes are selling at 1975 prices.

    Rent baby, rent.

  2. Again, BHs are putting their heads into the sand in how inflation/currency devaluation plays into all this. In plain English, what you pay for your mortgage doesn't get adjusted for inflation. It stays constant.

    A $25,000 home in 1970 was selling for $75,000 in 1980, but the homeowner who'd bought that home in 1970 was still paying his 5% mortgage on the $20,000 he'd borrowed to buy the house in 1970. The neighbor who waited until 1980 to buy the same house next doorwas paying a 20% mortgage on the $60,000 he'd borrowed to buy the house in 1980. Per Shiller's graph, the "real" price of the house hadn't gone up. But who is better off? The guy who bought in 1970 ... or the guy who waited till 1980?

  3. Lance
    I am hoarding cash and will put down a huge downpayment - or maybe even pay full (fire-sale) price.

    What say you now??

  4. "I am hoarding cash ... "


  5. Huh?

    We are in the most deflationary period that we have seen in years. I agree massive inflation is on the horizon - all the more reason to have your home and everything else owned outright and paid off

  6. Lance, you're an idiot (and/or a troll). Mortgages were not 5% in 1970. Not even close. Prices in 1970 were nowhere near where they are now relative to incomes or relative to inflation adjusted dollars. Not even close.

  7. "Again, BHs are putting their heads into the sand in how inflation/currency devaluation plays into all this."

    Arent you getting tired of saying these kinda things? Look dude, I was JUST about to buy a house last year....Im glad I didnt. The home I was going to buy dropped $80K in price and the interest rates dropped to about 4.9%.

    You think Im going to buy now while things are expected to drop even more this year? None of your inflation banter means jack to me, I basically saved myself $100K loss by not buying. (not even mentioning the REAL cost had I got a mortgage at near 7%)

  8. Lance,
    If houses are such a deal, buy several more right now. So what if they fall in price? In fact, pay last year's prices to show what a shrewd dude you are.

    Glad you are not in charge of my money.

    Living a life of blind idealism is far from ideal as seen in the spike in foreclosures.

    The Bubble Heads are right BTW.

  9. Last 2 anons. Good luck trying to "time the market". Personally, I'd rather make do with less and not buy a house based on how wild the fluctuations of its value are. Actually, I'd never even be looking at homes whose values fluctuated to the extent you describe. A bad property will remain a bad property long run ... even if you get it "for a steal". And a property whose values fluxuate to the extent you describe is a bad property. It sounds like you grew up thinking day trading was a normal, and that houses are nothing more than financial investments. They're an expense. And if you're going to minimize your expenses longterm, you need to realize that inflation/currency devaluation/time value of money, will trump any short term "day trading" gains you might you'll get by timing the market as you are attempting to do. Yeah, the guy who wins the lottery makes out big. (And that is what you are trying to do). But how many people do you think really win the lottery?

  10. Lance,

    You're comedy, pure comedy. Schiller adjusted for inflation in his graph.

    Buy and hold is dead.

    Welcome to the lost generation. We're 12 years in.


    PS, it appears you only realize you've been hit by a train after it runs over you. Nicht wahr?

  11. The old lance is back!

    ... like a bad rash.

    If it isn't one scare tactic it is another.

    Buy now or be priced out forever... prices will never fall in the DC area... the bottom has already past... you will WISH you had bought at these prices...

    Then, to top it all, he decides that any property that "fluctuates" in value must be a "bad" property and he of course would only buy a "good" property.

    It is a damn good thing you are such an obvious moron lance. I would hate to think there are people out there dumb enough to take your advice.

  12. Chuck,

    Yes, he adjusted for inflation ... and that is precisely the point. When you lock in your mortgage payments, your are locked in at a real dollar value. In real dollar terms, your payment goes down the more inflation occurs. Your looking at the real value of the house. And NOT looking at the real value of the payments you make.

  13. I take the re-emergence of lance as a good counter meter.

    He was active for about 24 months it was early in the bust, gone for about 10 when it was obvious this was a historic bust, and now he is back again.

    My guess, the worst is passed - declines will get less severe soon, and we will bottom in about 12-18 months.

  14. Lance old man, I agree that market timing is a fool's game. But three times in my life so far when real estate has gone into a bubble phase. It's OK not to buy when prices are obviously overinflated, and it's OK not to buy when prices are plunging.

    Really, it is, just like it's OK to look outside to check the weather before running out into a storm because 'on average' it should not be raining. On average you'll be right, but this time you're wrong.

    WSJ had a very nice article about a year ago looking at owning a house over time, factoring in all of the expenses involved along with inflation. Under the very best circumstances owning a house netted about 1% a year in most markets.

    So on average, a house is a very poor investment. A house is a place to live -- not an investment.

    The idea of the home-investment has gotten a lot of good people into horrible financial circumstances.

    Is standing in cash and renting better? For some absolutely. I own because I enjoy the autonomy it brings, but I paid cash and I am prepared to walk away, not counting on one cent of resale for retirement.

    But back to my point -- there was a bubble while the experts cried that there wasn't. Buying in the last 5 years was the wrong thing to do, and buying in the next year or two will be just as bad.

    Take a $500K condo down 40% over four years, plus taxes, interest, insurance -- Living in that condo can cost $70,000 a year anyway. That pays a bunch of rent and renting none of the heartache of an 'investment' gone bad.

    We don't need to make every mistake personally. It's OK to think it through and not follow the lemmings off the cliff.

    Really, it is.

    Anon- great idea using Lance as a counter indicator. 18 months -- hmmm. Sounds good. After the last crash prices were flat for almost a decade. How can we read the Lance Indicator to consider that?

  15. Anon 6:21. Actually you and I are in agreement about a lot of things from what I can seein your post. It sounds like you've been listening to what the BHs say I say ... rather than actually reading what I say.

    I really honestly believe that many (though definitely not all) BHs are wannabe flippers. IF they could have flipped, they would have. But because they couldn't (for myriad reasons), they're now angry at (and jealous of) ALL homeowners (read "blood in the streets", "pennies on the dollar" etc.) ... and can't understand that "A house is a place to live -- not an investment which incidentally is exactly what I've been saying all along. As well as saying that one must buy smartly. ... And that buying isn't for everyone at every stage in their lives. Where're definitely not in disagreement. Unless perhaps you think this anti-homeowner attitude exhibited by most (though not all) BHs is justified?

  16. You are as right about "bubbleheads" as you were with your market predictions lance!

    WTF does "if they could have flipped."

    Anyone with a pulse could have flipped during the bubble years, and many many did.

    The people on this blog are overwhelmingly people who are just trying to be careful with their money when making a huge purchase.

    For year after year you have given out crappy advice backed up with crappy predictions.

    You claimed prices wouldn't fall in the DC area because it was "different." You wanted to people to go ahead and buy even though by any reasonable measure they would be overpaying by a huge amount.

    You claimed sub-prime mortgages weren't an issue for the banks or financial system, and that would-be buyers should embrace exotic financing.

    Since the bust began you have lied continually about its extent, such as when you claimed that 90% of the area was stable or climbing...

    ...and of course since the bust began you have repeatedly called the "bottom" and warned "bubbleheads" to buy before they missed their chance.

    This isn't about "stages in life" or whether or not a house is a "place to live."

    This is about whether or not someone is making a smart financial decision to delay their purchase.

    If what they really want is instant gratification they can rush out and buy, countless did, but most of the people here are willing to think on a longer timeline and appreciate that a little sacrifice now will result in a much greater long term reward.

    The facts are simple, you are either a troll, or laughably ignorant, likely both.

    Your predictions have been 100% wrong, your advice has been 90% wrong, and you aren't even enough of a man to admit it.

  17. Anon 1:42;

    I'm fascinated with the extent to which Lance has gotten into your head.

  18. "Last 2 anons. Good luck trying to "time the market".


    Im not the one that called bottom a few hundred times last year. I was just stating a fact that I saved myself from a REAL bad financial f'up.

    Im glad I finally waited for the bubble correction here in MD to start. Last year I starting to think you were right, that this area was different.....but alas, its not.

  19. Anon, in the inner core we did indeed hit bottom last year. Read the posting above this one ... you'll see the stats right there.

    But again, when you buy a home it should only be if you are ready and able to hold on to it "longterm" (usually defined as a minimum of 5 years. And when you're looking at things longterm, the ups and downs you're looking at get washed out. Short term "gains" and "losses" only matter in the world of day trading ... not in the world of homebuying. If your first thought when you think of buying is "how much can I make on this?", you're probably not ready to buy ... and definitely should continue renting ... as many BHs have correctly done.

  20. "But again, when you buy a home it should only be if you are ready and able to hold on to it "longterm" (usually defined as a minimum of 5 years"


    Do you really think anyone thinking about buying a home right now is expecting anything other than a loss? Who the hell, especially on this blog, is thinking about buying to flip it in the next 5 years?

    You are a serious troll. Gotta be, nobody is that retarded.

  21. Anon,

    I know of a few friends and neighbors who've sold homes in the last 6 months, and every one of them has sold for MORE than what the paid for them ... including the one who purchased his home in late 2006. So no, it's not a given that you're going to have a loss buying something now. Unless of course you're looking at bad properties to begin with. Why would you even bother with looking at a house in a neighborhood where values are going down? It makes no sense to me.

    And as for the personal attacks, are you unaware of David's rules against them? In the past David has deleted such posts.

    Not that they bother. They really just reflect badly on you.

  22. Oooh, lance is trying to take the high road! LOL

    First he rolls out a bunch of lies and bullshit, then when he gets called on it, he wants posts deleted.

    A total stranger would get some slack here lance, but we know you all too well.

  23. "And as for the personal attacks, are you unaware of David's rules against them? In the past David has deleted such posts. "

    I wasnt attacking you personally. I dont know you. I just know that your posts that people who dont want to buy in a tanking market are flippers is from trolling or a complete retard.

  24. This graph clearly shows what a crock supply/demand are.

  25. LANCE:

    You don't have to time the market. Turn-arounds are not instantaneous and people who rented the last few years are well ahead of people who bought recently...LIKE YOU.

  26. What is hilarious is that lance likes to go on and on about how one shouldn't try to "time the market," but at the same time he continually tries to scare people into buying by telling them the market has already bottomed and they are missing their chance.


    "You shouldn't try to time the market, but you had better watch out! The market has already turned and you will quickly lose your chance!"

    He wants people to buy, always has. He has changed his story countless times in countless ways, but that is the one thing that is consistent. Buy now!

  27. "Noz said...
    This graph clearly shows what a crock supply/demand are."

    Clearly we are dealing with a formidable intellect here...

  28. "Anon said:

    Clearly we are dealing with a formidable intellect here..."

    If you had any, you'd be able to realize it.

  29. Stunning comeback there Nozzie.

    Reminds me of the Keynes Friedman debates of mid century.

  30. That's big of you being that A) you're anonymous and B) what you stated earlier was pointless.

  31. Noz,

    You better be careful, he might label you a fat 30 something exerb renter that sits in traffic on your way to work.

  32. Noz,

    You better be careful, he might label you a fat 30 something exerb renter that sits in traffic on your way to work.

    Nah - thats a different anon. I just dont like stupidity, be it from Lance, Noz, etc...

  33. This comment has been removed by a blog administrator.

  34. Nah - thats a different anon. I just dont like stupidity, be it from Lance, Noz, etc...

    That's big coming from someone who doesn't have a clue what I mean..

    Keep up the good work as stupidity police. You're doing a bang-up job!

  35. When only 9% of the population has the income to afford a home things are WAY OVERPRICED and.... when the homes that costs $995K only rents for $2600 you have the same problem but... what's worse than that?


    A Billion Minutes Ago Jesus Was Alive.

    If you spent $1 Million a Day, Everyday, for 2000 years, you wouldn't spend the stimulus package. What our current admin is trying to do has been tried many times over the last 400 years around the world and it DOES NOT WORK.... in germany they were burning cash instead of firewood because it was CHEAPER! (1920's)

    The United States has never had inflation get this out of control (yet) but during the 1970's, Vietnam was costing the nation a fortune, so the Treasury began printing money (lots of it). Of course, inflation took hold.

    Because of this, inflation hit double digits for a few years which later caused interest rates having to be raised in an effort to stop it. 99% of people under age 30 in America today are unaware mortgage interest rates in the early 80’s were over 18%. Now, I want you to imagine for a minute what effect even 10% mortgage rates would have on the currently fragile housing market?

    The answer to the above question…

    Is Only ONE of Many Issues We Face Today.

    You see, the U.S. Dollar has been declining in value since 2001. Combine this with the fact the U.S. Economy has evolved into a Consumption Based “Credit Driven” Economy and you have a BIG problem, but (believe it or not)…
    It Actually Gets Worse.

    With all the current bailouts and stimulus packages the federal government is essentially printing money faster than a 1,000 Parker Brothers plants spitting out Monopoly games on triple shifts and… all this money is set to be disbursed in LESS than 6 years. Do you know much about “how” they’re spending this money? 99.9% of America doesn’t…

    Sure, they’ll improve Section 8 housing in Sacramento with the SHRA (the city is getting 500 MILLION dollars) and they’ll work to repair streets in Los Angeles (they’re also getting 500 MILLION dollars) as well as provide solar water heaters for rural area families in Cidra, Puerto Rico (Yes, they’re getting HALF A BILLION as well – see more at: www.StimulusWatch.org). Of course, this is just the “real” projects (we don’t even want to talk about EARMARKS). Instead, we’ll talk about…

    How This is Most Likely Going to Play Out.

    As the hundreds of billions of dollars in newly “printed” cash begins flowing, some relief (and delaying of the inevitable) will occur. Kind of like the unemployed indebted college kid who gets approved for another student loan or credit card in the nick of time. Or, the cash strapped homeowner who refinances their home stripping the last of their equity to pay off their credit cards.

    Yes, all that glitters will “appear” as gold for a while, but in the background the harsh reality of Universal Economic Law will be kicking in. Since much of the employment created via the bailouts and stimulus plans is artificial, there is a bigger underlying question we need to ask. And that is…

    What’s Going to Happen to All The Jobs When The Borrowed Money Runs Out?

    I can answer that question and so can any 16 year old. All you have to do is go to www.StimulusWatch.org. Look at where your BORROWED BILLIONS in future tax dollars are going. You’ll quickly come to the conclusion that when the borrowed money runs out, so will most of the jobs. This is because the vast majority of projects your money is being spent are not creating anything sustainable with any real long term return on investment.

    Here’s a quick example of one such project:

    • WHERE: Las Vegas, Nevada
    • JOBS CREATED: 1875

    What are these 1875 men and women going to be put to work on? Believe it or not, they’re all going to be…

    “Constructing a new Performing Arts Center
    within the cities Union Park Development”

    If that doesn’t blow you away then this next piece will. Sure, Las Vegas has already taken a lot of peoples’ money over the years, but “analyze this” if you do nothing else today. If we take the total budget of 375 Million Dollars for this project and allocate HALF of it for materials and permits etc., that will leave 187.5 Million for wages.

    If we take this figure of $187,500,000 and then divide it by the average wage each worker will be paid on the project (say $60,000 per year), that works out to 3,125. This, in essence, represents the total number of “Payroll Years” in the project at $60,000 per year. Now, take this figure and divide it by the number of total workers 1,875. What do you come up with?

    Each Worker Will Be Employed an Average of
    18 Months Before The Money Runs Out!

    Depending on how much the current admin keeps grabbing the Government Credit cards and borrowing from the future I got one thing left to say:

    2012 will be an interesting year.

    Oh, one more thing...

    Personally, I’m a “political atheist” but people in the know tell me Senator Majority Leader Harry Reid from Nevada pushed for this as he’s up for re-election in 2010 (who knows?). Either way, I suppose 375 Million in stimulus money could buy a lot of votes, but in defense of our elected officials, I will say this; if anyone is frustrated with how they’re spending our money we may want to cut them a little slack. Why? Because in the case of the Stimulus Package…

    Our Politicians Had LESS Than 30 Days to Figure Out How to
    Spend $787,000,000,000 Billion Dollars!

    Obviously, not all the spending in the stimulus package is like the example in Vegas, but the majority of it you’ll find is not well researched, calculated or even thought out. What kind of job can you expect when you’ve got less than 30 days to allocate $787 BILLION (let alone less than 24 hours to read a 1300 page bill?).

    As these billions find their way into the economy it will slowly devalue everyone’s cash and savings. But another issue is inflation. Remember the story about Germany burning cash because it was cheaper to use for heat than spending it to buy firewood? Well, I don’t think that will happen in the United States, but I believe interest rates WILL have to go up if inflation is to be kept under control. And this is impossible to do without negatively affecting housing prices. Combine this with an already collapsing housing market, equities market and commodities market and you have the “perfect” storm.

    If that isn’t enough, than add in the fact the baby boomer generation (76 Million Strong) will begin spending less and paying less in taxes (because of their age and income) and downsizing to smaller homes and you have one very interesting scenario. Of course, there are a dozens other factors I won’t mention (like the fact state governments were getting record sales and property tax revenues the last 6 years straight!), but were not going to get into that today. No. Enough with all the bad news.

  36. "What our current admin is trying to do has been tried many times over the last 400 years around the world and it DOES NOT WORK"

    You seem to know a lot about what the "current admin" is doing.

    Please tell me, how much the LAST admin's stimulus package was? Also, where did that money go? Oh and tell me, what lead us to the point that a stimulus would be needed?

    You bitch a lot about mopping up all the broken eggs on the floor, but have nothing to say about the guy who broke them?

    You sound stupid complaining about how bad the taste of the medicine is while you are in your death bed with a fever.

  37. You sound even more stupid thinking they are actually trying to help you recover from your death bed.

  38. The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties in 363 metropolises. This information is obtained by reviewing repeat mortgage transactions on single-family properties whose mortgages have been purchased.

    Ebert Alves