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U.S. housing prices: a reality check.

U.S. housing prices: a reality check.
Comments (7)
  • HiSpeed
    , contributor
    Comments (1112) | Send Message
     
    Housing prices were a bubble. The prices simply need to correct back to the mean - and they will regardless of government intervention. It's a shame this simple concept escapes congress so easily.
    21 Feb 2009, 04:35 PM Reply Like
  • Tricky
    , contributor
    Comments (1583) | Send Message
     
    I don't disagree with you generally, HiSpeed. But I'd love to see that chart pegged to incomes or other measures of affordability. I'm not so sure that we need to get all the way down to 100 on this chart -- as currently constructed -- to be at the "appropriate mean"?
    21 Feb 2009, 06:09 PM Reply Like
  • travelite
    , contributor
    Comments (4) | Send Message
     
    In 1982 the Bureau of Labor Statistics (BLS) began modifying the method for calculating the Consumer Price Index (CPI). Economist John Williams at ShadowStats.com publishes an Alternate CPI that employs the method used by the BLS from 1913 to 1982. It would be interesting to see this graph corrected for inflation using the 1890 method for calculating CPI.
    21 Feb 2009, 08:47 PM Reply Like
  • Vladimir Senkov
    , contributor
    Comments (179) | Send Message
     
    Until I see the complete methodology used to construct this chart, I don't want to even begin to analyze it, let alone debate it.

     

    I searched around for it and couldn't find it. I'm not even sure if Shiller himself made it or if it was (more likely) built by someone else "based on Shiller's data". Yes, prices were in a bubble in most areas, it doesn't exactly take a maverick to figure that out. But painting the dotted line on a chart or saying "smart" stuff like "reversal to the mean" does not and can not have any predictive power whatsoever.

     

    After most banks are either bust already or are about to go bust, if we still haven't figured out that widely accepted formulas and/or "principles" of finance are in fact completely useless and people who push them are motivated to sell you something, generally full of it or simply misguided, then we fully deserve another "shocking crisis" to come down on us and then another and another, until we finally get a few simple concepts straight.
    21 Feb 2009, 09:57 PM Reply Like
  • travelite
    , contributor
    Comments (4) | Send Message
     
    Vladimir,

     

    I couldn't agree more. Where's the methodology? As far as I know, the original Shiller data is reported in nominal terms. How was this graph corrected for inflation?
    21 Feb 2009, 11:47 PM Reply Like
  • Vladimir Senkov
    , contributor
    Comments (179) | Send Message
     
    > How was this
    > graph corrected for inflation?

     

    My gut feeling is, it was done in a way that best supports the point that the author of the chart was trying to make.

     

    The dotted line and the mention of the "mean reversion principle of financial fortune telling" sort of gave it away.
    I believe Shiller is a respected academic and an economist, so I'd be surprised if he fell so low, but then again, I've been surprised before. After all, so was Greenspan who only recently came to terms that his view of the world was a naive fantasy.
    22 Feb 2009, 12:48 AM Reply Like
  • Vladimir Senkov
    , contributor
    Comments (179) | Send Message
     
    Original chart appeared in Shiller's book called "Irrational exuberance", 2nd edition, first printed in 2005.
    I know paperback version is from 2006, but I doubt the chart is different there.
    So why is this "news" now? Are some folks catching up on their reading? :)
    The chart as it looks in the book (assuming I'm looking at the right one, pg13, figure 2.1) looks quite different.
    It shows other interesting trends like cost to build, population growth, interest rates, etc. IT DOES NOT HAVE THE DOTTED LINE :)
    I guess Bill Marsh from NYT "enhanced" the chart.

     

    Shiller also has another chart. S&P 500 over the same period.
    looks very similar, except real estate prices started to skyrocket a couple of years after the market did and to a lesser extent.

     

    Unfortunately I couldn't find a good explanation of exactly how Shiller adjusted these charts for inflation. I guess I should have read the entire book, but hopefully someone could explain that part here and save me some time?
    22 Feb 2009, 01:31 AM Reply Like
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