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The eminently useful New York Times Buy or Rent calculator assumes a 3% average annual rise in home prices. Curious whether that value made sense, I did some research and came across the views of Robert Shiller, creator of the Case-Shiller index for real estate. He apparently argues that home prices tend to return to their 1890 prices.

Is there some credence to the belief that real estate prices tend to rise over the long term? Or, is this really just a widespread myth, as Shiller argues?

Obviously this greatly effects personal finance calculations because the rate of growth in housing prices is one of the main factors effecting the buy or rent decision, from a purely financial perspective.

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    Isn't all forecasting based on some assumptions? And any projection is rebutted by somebody with different assumptions? Economics isn't really a hard science when it comes to the prognosis of the future. – Ghanima May 15 '15 at 22:49
  • @Ghanima, Note that I did not ask, "Will housing prices go up?" I asked, "What is the argument that says housing prices go up?" – Logical Fallacy May 15 '15 at 22:58
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    Relevant pic - cdn.theatlantic.com/static/mt/assets/business/assets_c/2011/03/… Seems that a $6900 house in 1890 is the inflation adjusted equivalent of a $175K house nowadays. More to read --- jparsons.net/housingbubble – Knuckle-Dragger May 15 '15 at 23:11
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    Inflation. Housing is not an asset class (unless it is rental housing), it is an expense. – ChuckCottrill May 16 '15 at 1:00
  • Yes @ElephantsonParade, all I say is that those arguments are just assumptions or based on such. And you'll always end up finding experts that claim the exact opposite. At best there is a certain probability of that prognosis coming true in the future. Please note that I did not say that the question is stupid, I am just as interested in an answer as are you. – Ghanima May 16 '15 at 9:55
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Several people have mentioned the obvious: inflation. But let's assume we are talking about real (inflation adjusted) prices.

One argument is that populations keep rising while the land does not change. So the price of homes in desirable places gets pushed up and people move to second-best locations, pushing those prices up, etc. Similar Malthusian argument holds for raw materials (steel, granite, fine wood, etc.).

Another argument is that the economy has a long-term upward trajectory (that's the assumption). So each generation, as a whole, has more disposable real income than the previous. As disposable income increases, people tend to put more and more money into their homes, pushing prices up. True for all goods, of course, but it may be more true for real estate than for other types of goods.

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    But it's not the case. Shiller data basically said that house pricing has been inflation-adjusted flatlined over the last 100+ years. – JoeTaxpayer May 18 '15 at 0:25
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    @JoeTaxpayer: the question was what arguments exist, not whether they or the statement they attempt to support are correct <grin/> ... The claim also has somewhat different answers in different parts of the country. But as the recent history demonstrates, this is often driven mostly by wishful thinking and the myth of the Ultimate Sucker. – keshlam May 18 '15 at 2:38
  • This answer is the most useful to me so far in providing a counter-argument to Shiller's claim that housing prices do not trend upward in real terms. I would still like to hear a real-estate economist's opinion on the subject (e.g., some sources would be nice). – Logical Fallacy May 18 '15 at 14:39
  • It's not really a counter-argument to Shiller per se. It's the other way around. Part of Shiller's analysis is to precisely counter this argument, which is why he charts home prices against population. If you want to see references for what he's arguing against, you can look at his book and follow his references. The three basic arguments for long term housing prices trending are based on population, costs, and interest rates, resp. (sorry I haven't gotten around to supplying my own answer... been busy but following this thread with interest) – Chan-Ho Suh May 19 '15 at 3:44
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The Shiller data is inflation adjusted. In effect, a flat line means that long term, housing rises with inflation, no more no less. There's no argument, just the underlying data to support his charts. This, among them.

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As much as I respect Nobel Prize winning Robert Shiller, his approach and analysis of the boom ignored interest rates. Say we look at a $50K earning couple. This is just below median income. At 9%, they qualify to borrow $145K. As rates fell to 4%, they qualify for $244K. Same fixed 30 term. Ignoring all other factors, the swing in rates will generate an oscillation around the long term trend. And my own data crunching suggests the equilibrium median home price will tend toward the price supported by the median income.

A similar, but not identical question - Why can't house prices be out of tune with salaries?

In response to Chan-Ho's comment - I'd imagine Shiller understood the interest impact. To clarify, the chart, as presented, ignores it.

  • In Irrational Exuberance, Chapter 2, he lays out his historical analysis. He has a total of 3 charts. The first plots home prices against long-term interest rates, building costs, and population. These latter three are of course components of very common explanations for the housing boom, as Shiller was clearly aware. From the beginning of chapter 2, "Another glib explanation is that the boom is due to the interest rate cuts...while low interest rates are [a factor], central banks have cut interst rates many times in history, and such actions never produced such concerted booms." – Chan-Ho Suh May 17 '15 at 5:12
  • You can download Shiller's Excel data for the chart here: econ.yale.edu/~shiller/data/Fig3-1.xls – Chan-Ho Suh May 17 '15 at 5:15
  • I've read your answer a couple of times, and I don't quite follow. Are you presenting an dissenting view or just a caveat to Shiller's argument? – Logical Fallacy May 18 '15 at 16:10
  • I agree that Shiller's data supports the fact that over the very long term, house prices track inflation and don't rise in real terms. – JoeTaxpayer May 22 '15 at 18:22
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It is supported by inflation and historical values. if you look at real estate as well as the stock market they have consistently increased over a long period of history even with short term drops. It is also based on inflation and the fact that the price of land and building material has increased over time.

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