Until about 2006 if you talk to real estate agents, they’d always tell you that nationwide, on average, housing always goes up in price.
There could be layoffs, or maybe oil went south then people have layoffs in Texas so housing prices go down in Texas, but nothing nationwide. Housing prices do nothing but go up. And that, for the most has been true since the great depression. Now housing prices have been going up 1% or so per year, actually a little bit less in real terms.
Something fundamentally amazing happened in the beginning part of this decade. I have right here the Case-Shiller index, and this is probably the best estimate of housing prices I can find. This is better than the median because the Case-Shiller actually tries to compare the price you’d pay for the same house.
If we look at the Case-Shiller index in 2000 and then again in 2004, nationwide prices had increased by 46%. And by 2006 where they peaked, they had increased by 88%. They had almost doubled since the price in 2000.
The obvious question is, why did this happen?
What drove prices to increase so fast when for most of the history of America, housing prices have never increased this fast, especially considering what was happening in the broader economy.
What do I mean by that? Well for the price of anything to increase, what has to happen? Well, the demand has to increase faster than the supply right? So let’s look at possible theories. What are demand drivers that could make housing prices go higher? Well, maybe the population grew faster. So population goes up. That’s a demand driver. What’s another demand driver? Incomes go up, right? That’s another reason. Maybe if a lot of people just become a lot richer, they’re willing to pay for houses.
What are the supply drivers?
Well these are new homes built. So if you buy the classical supply-demand argument why then did housing prices increase by 40% from 2000 to 2004 or why they increased by 80% from 2000 to 2006, these dynamics should have grown faster than these dynamics. So the population or maybe the total income grew faster than the new homes built. So let’s see if that’s true.
I found this New York Times’ article and found the average of incomes reported on all tax returns. From 2000 to 2004, the average reported actually went down. So here they say the total reported income in 2004 in dollars fell 1.4%. But because the population grew during that period, average real incomes declined more than twice as much falling by $1641 a year or 3%.
They’re saying the total income fell by 1.4%, but the population must have grown by about 1.5% and so the average per capita was 3%. Let me write that in summary.
We know from 2000 to 2004 that the population increased by roughly 1.5%. Then if you go to the income per tax filing, that declined by 3%. Therefore, the total money actually declined by 1.4%. Because of that, the argument that somehow there’s more money out there chasing the same number of homes or a slightly larger number of homes doesn’t really carry much weight.
But let’s just make sure, maybe for some reason houses were destroyed or the number of homes built just didn’t keep pace with this population increase.
I found this for 1999. They say the composition of an estimated 115 million housing units in the United States. So we can say roughly that in 2000 that there were 115 million housing units.
On an annualized basis, maybe 1.5 million homes were being built per year in 2000, but it started accelerating all the way to 2004. By 2004, we were building roughly 2 million homes a year. Over that time period, we can say on average we were building about 1.8 million new homes per year. And we can assume that homes destroyed were pretty negligible. I’m not aware of most neighborhoods where they were bulldozing homes. If anything, they were just renovating homes. But these are brand new homes. So over that four-year period how many homes were built? Well 1.8 x 4 that’s roughly 7.2 million new homes were built over that time period and we started with a base of 115 million roughly in 2000. So over that time period the housing stock (home supply) increased by 6%.
So what’s going on here?
From 2000 to 2004, we built a ton of houses. The supply of homes went up by 6%. People’s incomes actually went down because we were in a recession. People we’re getting laid off or they were just willing to work for less. Income went down and the population barely increased. And if we look at the total dollars that were being earned, that actually went down. The money out there to pay for houses went down and at the same time the total number of houses went up. But at the same time over this exact same period, the prices of houses went up by 46% and it actually continued to rise up until 2006 where it went up 80% relative to 2000.
Basic economics would tell us that if the supply is increasing and the demand is decreasing, prices should come down. So what happened? I’m going to let you think about that a little bit. The supply and demand thing would tell you the prices went down, but not only did they not go down, but they rose up faster than they’ve ever done in the history of the United States. In the next lesson I’m going to tell you why I’m pretty sure housing prices did go up.
See you soon.
