The Decline of Home Values

February 15, 2011

On February 11th, I attended a conference here in Fort Myers entitled, Lee County in the Year 2035: Back to the Future? A number of notable local and state experts shared their predictions of what Lee County will look like in the year 2035 and how we will get there.

I attended the morning session only which discussed, The Demographics in 2035 and The Economy in 2035.  Presenters during this part of the conference were Jim Nathan, Dr. Erin Harrel, Thomas Scott, Thomas Wallace, Hank Fishkind and Woody Hanson.

Over the coming weeks, I will report on some of the more interesting topics discussed during the conference, however, in this post I will discuss one of the more interesting graphs displayed during Woody Hanson’s presentation.

Woody’s topic was entitled The Era of Less.  He presented a number of interesting facts about the Lee County housing market but the most notable was his graph called A History of Home Values.  The original chart was published in August 2006.  An updated chart was presented in May 2010 in The Big Picture (see below).

The chart goes back to the year 1890 which is the benchmark level (100) on the chart.  If a house sold in 1890 for $100,000 (inflation adjusted in today’s dollars), an equivalent house would have sold for $66,000 81 1920, $199,000 in 2006 and around $145,000 today.  The chart predicts a value of $110,000 before the market starts to turn around. 

The graph was the work of Dr. Robert J. Shiller, the Yale economist Robert J. Shiller who created an index of American housing prices going back to 1890. It is based on sale prices of standard existing houses, not new construction, to track the value of housing as an investment over time. It presents housing values in consistent terms over 116 years, factoring out the effects of inflation.

In 1991, he formed Case Shiller Weiss with economists Karl Case and Allan Weiss. The company produced a repeat-sales index using home sales prices data from across the nation, studying home pricing trends. The index was developed by Shiller and Case when Case was studying unsustainable house pricing booms in Boston and Shiller was studying the behavioral aspects of economic bubbles. The repeat-sales index developed by Case and Shiller was later acquired and further developed by Fiserv and Standard & Poor, creating the Case-Shiller index.

Back in 2005 on CNBC, Shiller noted that housing price rises could not outstrip inflation in the long term because, except for land restricted sites, house prices would tend toward building costs plus normal economic profit.  He warned of an impending implosion in the U.S. real estate market. At the time, a co-panelist vehemently disagreed.

Writing in the Wall Street Journal in August 2006, Shiller again warned that “there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected.”

Posted by Scott R. Lodde

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