US Long Term Home Prices

Here are two views on the long term trend for US home prices. Many argue that the long term real home price change is between 0% and 2%.

Taking Shiller's annual home price index yearly data back to 1890, one view is to take the linear trend of the real prices and measure where we're at compared to where we "should" be based on this trend. However, the trend here is based on a substantially "negative" event near the beginning (the Great Depression) and a significant "positive" event in the more recent past (the 2000s bubble).

These two events could cause a shift in the underlying "real" trend in a positive manner. One way to remove that bias is to look at the impact is to remove those two periods. While this reduces the number of observances for the trend, if the observances removed are believed to be abnormal, this may be justified.

Hence, the second line uses the period from 1950 to 2000 to develop the trend. Interestingly, when forecast back to 1890, the forecast number is only 0.4% off from the actual.

So, what's this mean? Based purely on these two views of the long term trends in housing prices we find two similar, but slightly different, current states.

Under the normal long term linear trend the US Housing Index has been under where the trend would have us for the past two years, currently under by -6.3%. Using the more limited 1950-2000 data set, the 2011 level of 120.08 is still 4.1% over the trend.