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The Housing Bubble That Wasn’t

In a column in August, I reported that almost every large news magazine and major newspaper was predicting the real estate bubble was about to pop. I concluded that, when the major financial press all agree an event is eminent, that is the best guarantee it probably isn’t.

As I pointed out at that time, I don’t remember reading screaming headlines in 1999 or 2000 about the coming dot.com bubble. My experience is that the financial press does not have a great record of calling market tops.

I suggested that, rather than a crash, a soft landing might be a more likely fate for the real estate markets. This would be similar to what has happened in Australia, where prices have gone flat or fallen slightly.

I have recently come across some additional information that seems to support those conclusions. It possibly even calls into question whether there is a real estate bubble at all. This is from the November issue of Wired magazine, supported by statistics from the National Association of Home Builders, the National Bureau of Economic Research, the US Bureau of Labor Statistics, and the US Census Bureau.

If we compare housing statistics in 1950 with those of today, we find that housing is not overpriced at all. Adjusted for inflation, housing cost $60.61 per square foot in 1950. Today, the cost is $59.49 per square foot. In 1950, the average home cost 229% of a family’s annual income. Today the cost is 251% of a family’s annual income.

Certainly, the average cost of a house has increased. In 1950 (adjusted for inflation) the average house cost $59,575, and today the average home costs $138,601. However, the average home in 1950 had two bedrooms, one bath, a one-car garage, and 983 square feet. Today, the average home has three bedrooms, two baths, a fireplace, central air, a two-car garage and 2,330 square feet. In 1950 , the average person lived in 289 square feet of space. Today, with the decrease in family size and the increase in the size of houses, it is 896 square feet per person.

Over the past 55 years, while housing prices have increased 133%, the average square footage of a home has increased almost proportionately by 137%. The average income has increased 113%, indicating that housing costs have increased slightly. Still, they have not gone out of sight, as many of us might be led to believe.

Another interesting—and to me, quite startling—fact in light of the current soaring energy costs is that we are paying less today for heating costs than we did in 1950. Again adjusted for inflation, the annual heating cost in 1950 was $3,419. Today (as of September 2005) the cost is $2,644. The percent of annual income that heating costs represent was 13% in 1950 versus 5% today.

If there really isn’t a real-estate bubble, is that good news or bad news? Obviously, the answer depends on your individual circumstances. It may be good news if you will be selling a house in the near future. If you are trying to decide whether to buy a house, this may be either good or bad news. If prices aren’t likely to come down, there is less chance that housing will become more affordable. At the same time, if you do buy a house you can be more confident that it is likely to maintain its value.

The bottom line is that, bubble or not, it’s probably wisest to base housing decisions more on what fits your particular situation and less on predictions or worries about the real-estate market.

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2 Responses to The Housing Bubble That Wasn’t

  1. Amy Hall November 4, 2005 at 11:20 am #

    Rick,

    Why 1950? My question is whether or not 1950 is a good benchmark. Have you compared today’s prices with several other decades? I’m just wondering if 1950 was a time of great prosperity and if maybe prices were out of proportion then compared with other decades.

    -Amy Hall

  2. Jeff Grimm November 4, 2005 at 12:39 pm #

    Rick,

    I realize that your column only has space for generalized comments. But being superficial with statistics is a slippery slope. I don’t think you can draw any conclusions about a particular area of the economy, in this case housing costs, in a vacuum. You have to look at the entire picture. The income that has increased 113% may have much greater demands placed on it in areas not discussed — health care, for instance — that limits the household’s ability to spend money in other sectors, such as, perhaps, housing. Also, I don’t believe the average household is willing to live as frugally as our parents did in the 50s, which puts a lot more demands on the income. For instance, when you and I were kids, a big night out was a movie at the Elks Theatre where admission was 35 cents. And even at that price, two or three movies a year was about all we could realistically expect.