“People [wrongly] think it’s a law of nature [that housing prices always go up so as to always beat inflation]” says Yale University economics professor Robert J. Shiller and economist Karl E. Case. Interviewed by the New York Times, Yale economist Mr. Shiller relates that there has been an overall “bubble” since the end of World War II that is unlikely to be repeated, but that even during that historically unprecedented 60 year post WWII boom, that housing values outpaced inflation by only 1.1% per year. Quite to the contrary of the 1947-2005 point of view, during the 1900-1946 time period people saw houses quite differently. They saw them like they were cars. Houses 1900-1946 were seen as a consumer durable that the buyer eventually used up says Yale economist Shiller.
According to Yale University economist Shiller, the first notion of housing as an investment first began to blossom after WWII, when the nesting urges of returning soldiers created a construction boom. Demand was then further stoked as the “baby boom” of post WWII babies grew up and bought places of their own in the 1970s.
Adding fuel to the post WWII housing boom, (1) the inflation of the 1970s (which increased the value of hard assets) and (2) liberal tax policies (like deductible mortgage interest and property taxes AND lack of significant capital gains on housing appreciation) both helped make housing a good bet to at least slightly beat inflation.
Nevertheless, Yale’s economist Shiller says that despite all of these accelerating economic “tailwinds” prices rose moderately for much of the period, providing a mere 1.1% annual increase in value after inflation. However, during the extraordinary housing bubble that began in the late 1990s, housing prices were beating inflation by an average of 4.0% per year.
Zillow.com chief economist Stan Humphries echos Mr. Shiller, saying housing prices will be lucky to beat inflation, as quoted in the New York Times on August 23, 2010: “There is no iron law that real estate must appreciate…all those theories advanced during the boom about why housing is special – that more people are choosing to spend more on housing, that more people are moving to the coasts, that we are running out of usable land – didn’t hold up.”
I urge all of my customers in Tacoma, Renton, Olympia, Bremerton, Chehalis, and throughout Washington state to please read David Streitfeld’s front page article in the Monday, August 23, 2010 New York Times , which provided the content for this blog post.