Historical Prices and Inflation - Revisited

Nary a week goes by I don't get a couple requests to revisit this post. I wasn't thinking of doing it because prices are pretty much still in the same territory now as it was then, and inflation has been negligible... but my will has finally been broken, so let's just giv'er!

Like last time, we'll start off giving you a look at the historical prices from a nominal perspective. That trajectory it took in 2006 still scares the hell out of me. Wow. Anyway, nominal prices are not that interesting or useful, so lets get on to the good stuff.

Alrighty then, here is the inflation adjusted graph (all figures are in today's dollars). Obviously there are two periods that jump out at us, the big bubble there in the late 70's/early 80's, and the big spike from '06 on.

You've likely noted the presence of a series of dotted lines, now we'll touch on those. Starting with the top one, which shows us the peak of the prior bubble and how long it took for prices to return to that level. We had the price top out at ~$232,000 in August 1979... a level it would not again reach until March of 2006. A period of twenty-six years and seven months for the mathematically challenged.

The yellowish line is a (exponential) trend line/best-fit line. It shows that from 1962-to-present we've had roughly 1.6% annual appreciation. It theorized that our residential average should be closer to the $220,000-225,000 range currently. Thus the market is close to $100,000 over-valued at the moment relative to the long-term trend. At the peak of the market the spread was close to $150,000.

Finally I also included something of a price support line. These are used as a way of estimating the absolute bottom of a market, thus when prices near the price support line users start buying. That's not even to say prices must reach that level (or couldn't drop further for that matter), merely that if they do, it's considered a trigger to buy as the price had overshot the mean.

For the price support line going back to 1962 it figures in an annual appreciation of about 2.0%. Which is actually steeper then the trend line, but started much lower. I'm not a big fan of these... that said, if prices ever do again approach it's curve I would probably be VERY bullish too by then as the residential average would be below $200,000, so I guess they can't be so bad.

I'd likely be one of the few that are bullish, as we'd be well into the "despair" phase of the bubble model. Such is the plight of herd mentality... just as it can feed a bubble, it was destroy it, and then some.

Me personally, I don't think I'd even start looking until the average returns to around $250,000... and probably not think about letting the cheque book see the light of day until it was around $230,000. Of course this is all dependent on interest rates, if they stay at current levels for years on end obviously prices would settle higher... conversely if rates went much above 7% I'd expect prices to settle lower.

But that's just me and my take of where the fundamentals point, and as Keynes said, the market can stay irrational longer than you can stay solvent... though just because it can doesn't mean will, and after witnessing the clusterfuck his minions have delivered us to currently, I'll take my chances.