Critical Eye Required When Looking At Housing Data

This post is a reply to the anonymous person that posted the following comment today:

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Most of the ppl reading this blog are just praying for a good deal cause they got screwed out of the boom for the last 10 years.

I mean, do people really believe there's going to be fire sales based on housing's track record?

http://www.nahb.org/generic.aspx?sectionID=131&genericContentID=503

Aside from a small blip in 91-93, which quickly recovered in 94, there has been no real prolonged downturns.

If this were a stock, I'd say the performance were pretty damn good.
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The anonymous poster points to data available on the National Association of Homebuilders website as an indication that housing has traditionally been a "good investment".

Fair enough anonymous, unlike most others here, you actually provided a reference to some publically available data to make your point.

But let's take a good look at that data before we jump to the obvious conclusions. The NAHB data available at that link are annual median and average prices of a new home in the United States. The source of the data is the Census department, I have no reason to not believe those numbers, so we'll just take them as is.

However, the numbers provided are not "real". No, I don't mean that those numbers are somehow being faked, but they have not been adjusted for inflation. Inflation is real, it exists, and it erodes the value of your dollars. A 1980 dollar is a very different thing than a 2006 dollar. Let me show you what I mean.

This chart shows the median new home price from 1980 to 2005. Wow, it certainly does look like new homes are a great investment, the price has consistenly gone up, year after year. However, what happens if we make dollar from 1980 worth the same amount as a dollar from 2005? If we do that, then we can compare apples to apples, so to speak. Using the inflation calculator found here (http://minneapolisfed.org/Research/data/us/calc/) I adjusted the median home price for inflation. This was a simplistic approach, and yes let's just believe the CPI numbers to be true, but it serves the purpose. So lets see what happens to the chart above when we adjust the values.


Ok, so now that we level out the playing field with regards to the value of a dollar. The picture begins to become a bit clearer. The decline in housing after the bubble burst in the late 80's becomes more obvious. It's no longer just a little blip on the way up. It should be obvious to you now why industry sources don't adjust their values for inflation.

There is another aspect we just can't neglect here. What about the change in quality and size of homes from 1980 until today? Homes today are much larger than in 1980. In fact, in 1980 the median home was approximately 25% smaller than the median home was in 2005 (1595 sq/ft versus 2140 sq/ft). Since the size of the home affects it's price, we're again comparing apples and oranges. We certainly can't compare a smaller and less ornate home built in 1980 with the larger and more elaborate home built in 2005. So what do we need to do? Adjust the values so that we can make a comparison. In order to do this, we first need to find out the median size of a home over the same time period. Luckily, the Census department makes that data available online. You can find it here (http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf). In order to adjust I simply created an index that compared each year with 2005. I than multiplied the price of the home each year with the index in order to normalize prices across all years. So lets see what happens when we make both 1980's dollars and homes equal to the same in 2005.

Indeed, a much different picture from the simplistic view we initially took when looking at the data. My adjustment only takes into account the change in square footage, a very simplistic approach. It's arguable that changes in quality of fixtures should also be included. That aside, the data now tells a much different story. Great gains? Hardly, especially once you factor in the cost of upkeep and repairs over 20 years.

Also keep in mind that we're talking about the median price of a home in the United States. This is more of an economic indicator than some kind of insight into the house price movements of local markets. The midwest likely saw less of an impact during the last bubble collapse. Thus, the national median doesn't reflect price changes in smaller markets.

My only advice is to be careful when someone presents you with data, especially those who have a vested interest in your actions as a response to that data. The NAR paint a very rosy picture and love to quote unadjusted median home prices. Those numbers don't tell the real story.

Home prices do fall.

Caveat Emptor!
Grim