US house prices fall to 1890s levels (where they usually are)

According to Case-Shiller/S&P, US housing prices have fallen to levels not seen since the 1890s (adjusted for inflation, of course), in 11 of 20 markets. It looks like this is slightly skewed by the serious economic problems in rustbelt cities, which is not to say that things aren't pretty terrible -- and the same analysis predicts a further decline of 15-20%.
Some years back, Yale Professor Robert Shiller produced a long-run nominal home price index for the U.S. by fusing together data that had been gathered from a number of historical archives.

Shiller then adjusted the index for inflation revealing the very interesting fact that, in real terms, prices for U.S. homes changed very little over the span from 1890 to the mid-1990s.

This might come as a surprise to many since recent "common sense" notions held that homes were always a great investment carrying the implication that they must typically increase in value yet, the reality is that over the long run home prices must stay in-line with changes in the level of income (the source generally used to fund the home cost) or else typical households would not be capable of making a purchase.

Home prices falling to level of 1890s


  1. Cory, you can read a graph (and the article) better than that… the price index has fallen to where it was about 10 years ago (look at the blue line). This is still higher than at any other time on the graph. Even the “percent change from previous decade” (first derivative of the price index) is where it was in the 50s. As for the prices “not seen since the 1890s”, the blue line crosses the 1890s reference point over a dozen times since then.

    I’m not saying the market doesn’t suck, but c’mon.

    1. The graph does not show the first derivative. The first derivative would indicate the rate of change, not the percent change. Just looking at the most recent peak in the last decade, the first derivative would quickly jump to a somewhat constant value for the first five years, drop like a rock to zero midway through, and past it down to a value nearly equal in magnitude but opposite in sign for the last five years.

  2. Read this from the article which pretty clearly contradicts Cory’s post:
    “Since 2006 home prices have continually declined yet the current level is still significantly elevated over the level that had been typical for the 100 years prior to the bubble.

    Further, it’s important to note that the ten year rate of change of real national home prices is still positive… we have yet to experience enough of a decline to erase all the gains of the prior ten years.”

  3. When corrected for inflation, house prices stay roughly the same. I find myself wondering if that’s not supposed to be incredibly obvious. Inflation is the rise of average costs, and a house is a pretty big chunk of your costs. So it makes kinda sense that house prices should stay roughly the same in the long run, shouldn’t it?

    1. Hear here!

      The only alternative to this conclusion is that housing expenses should rise or fall as a percentage of your income — but bankers claim 1/3 as an absolute, so it can’t!

      Of course, a plot of real estate prices to average (or at least median) income would be quite boring. Aside from a short lead time, they would match up rather uniformly.

  4. Of *COURSE* home prices stay roughly the same (adjusting for inflation and averaged over locations and averaged over dips and bubbles).

    If this were not true, if home prices actually rose continually like we’ve been told, then only Bill Gates and J.K.Rowling would be able to afford a home by now.

    I realized this about six years ago just after buying a home that was too expensive.

    1. Actually, my impression is that in some very real way, houses have gotten more expensive. My parents could afford a reasonably big house and raise a family on a single income. My wife and I need a double income to do so. I admit, we live in Amsterdam, which is a hideously expensive city to live (house prices barely dropped during the mortgage crisis), but still, how do other people manage?

      1. in some very real way, houses have gotten more expensive. My parents could afford a reasonably big house

        I think it should be straighforward to document that houses are far bigger than they were a generation or two ago.

        In most big cities, it’s easy to see the ’40’s – 60’s suburbs with their small houses/small lots versus the ’80’s – 00’s suburbs with homes twice or more the size.

        Just anecdotally, I grew up in a Chicago bungalow, five of us in 1000 square feet, and never felt “poor” in any way. Part of that was my parents’ burning the mortgage ten years after they moved in. A different time in many ways, and not a worse one in that particular way….

        1. Houses have indeed gotten huge. The homes in Levittown for example, that first model for the American suburb, were 900 sq. feet. And build at a time when the average American family had 4.5 members in a home. How homes average 2500 sq. feet, and the average household size is 2.5.

  5. This is a pretty useless bit of information. I do NOT care what homes in California or Florida or Vegas are trading at. Does NOT matter to my local market, other than all the fools taking this data as having any sort of meaning. As somebody who recently bought a house in the Cincinnati area I can tell you that prices are down a little, but nowhere near what this graph would tell you. The Bay Area, where I lived from ’99 to ’01 has been a ponzi scheme for a while. Similar issues in Florida and Vegas (half million dollar houses in the middle of a desert? Really? There’s NO water here!) THESE prices are being adjusted down as the artificial bubble pops. Cincinnati didn’t have as much of a bubble, so there’s much less crash.

    So unless you’re trying to make policy for the nation or something, this vague model is a LOT of hand waving.

    1. The prices on the houses in Cincinnati and similar places never went through the roof like they did in some of these other areas, so of course their prices aren’t down the same amount. Prices on homes where you live are likely reasonably affordable, having started at, and stayed at, historically normalish prices.

    1. Rob, Pittsburg has had a decades long housing glut since it was on the leading edge of the rust belt deindustrialization and lost 1/3 it’s population. Prices don’t rise without scarcity.

      I went to college there in 79, just as it was tipping over the edge.

    2. My former house in Palm Springs was worth $625K in 2005, sold for $480K in 2007 and is now worth $265K.

      1. Your house was not “worth” $625k in 2005 or $265k today. It is worth the amount of money a specific buyer will pay you at that moment. The mortgage rate times the loan amount determines the amount of the monthly payment. The bank has a much higher impact on your house price than the materials and labor that went into it.

        No home valuation is accurate because homes are not a commodity market. The tax appraisal and the mortgage appraisal may differ by 20-30%. One wants you to pay high taxes and the other wants to lowball the value of your collateral.

        Realtors put forth the idea that a house has a value of its own. The reality is – how stupid is my buyer? How much of their money can I take?

        1. I had a valid offer of $625K, which I didn’t take because I wasn’t ready to sell. My house was worth $625K. It’s worth $265K today based on sales in that neighborhood. I was a realtor. I know how to determine the actual market value of a home.

          1. I got out of the industry and sold my house just in time. And yet, there are still people pretending that home prices are going to soar really, really soon.

    3. Though, mostly that’s because Pittsburgh crashed earlier and reinvented itself earlier, so it’s got that head start.

  6. There is some economic magical thinking inherent in this statement from the article: “the reality is that over the long run home prices must stay in-line with changes in the level of income (the source generally used to fund the home cost) or else typical households would not be capable of making a purchase.”

    What HAS changed enormously over the course of the 20th century is a massive federal subsidy for housing purchases (and lack of any subsidy for renting). If you wished to buy a house in 1890 or in 1930 you would likely pay cash. If you were able to get a bank mortgage (if we were well-to-do and had a reputation), you would pay around 50 percent down and then pay off the rest in 5 years usually, at up to 50 percent interest.

    So when the HOLC and the FHA and especially the VA loans of the 1940s came in, with 0-10 percent down payments and 30 year amortizations and guaranteed 5-10 percent interest rates, it was a revolution. That revolution in fact DID change the ability of households to buy rather than rent. Together with massive federal subsides for sewers, water supplies, roads, tax deductions, etc it made possible suburbia. It is a bit disingenuous to pretend that these federal subsidies didn’t completely alter the ability of families to buy.

    Finally, its a quibble, but houses really were a pretty good investment for most people from 1945-2000 or so. They were such a good value because of governmental subsidies and demographic accident, but they were still a pretty good decision for an aging population that could avoid the crushing blow of rent in old age, especially if they could reverse-mortgage their house and live off the excess.

    1. Seconding this post in its entirety, which is clear and accurate in all respects.

      One point to add: all those governmental subsidies enabling suburban living are entitlements that cost us taxpayers a lot more than “welfare” programs such as food stamps.

      Preaching to the choir, I know, but I still had to say it.

  7. Forgot the punch line for my previous comment. The point is, this graph and the claims beneath it take housing prices _out of context_ as if they ever really stood alone in the decision to buy or not.

    Like many economic claims, this one fails to see how the context around homeownership mattered–its cultural meaning, its role in forcing savings which could then be available to the elderly, its sense of security, the millions of allied jobs in design, construction, banking, title insurance, landscaping, the key role of homeownership in American claims during the Cold War (see Kitchen Debate, The), etc etc.

    Point taken: Houses are not a good investment and have never been.
    But owning a home was NEVER just about investing! Not for the Congress and not for those who bought them.

    1. But owning a home was NEVER just about investing!

      There are a lot of good cultural reasons to own a home. The problem arises when people who want to buy homes for those reasons are in competition with those who want to buy and flip, and the latter have access to virtually unlimited financing tacitly backed up by the promise of a government bailout if the floor drops out.

  8. I notice no one has even mentioned interest rates, which allow people to buy more expensive houses while paying the same monthly rate. Reducing interest rates allows people to buy more expensive houses, which increases housing prices. That is the primary reason we are still over the 1890 level.

    The situation we’re in now is the same one the government is in on the national debt. Raising interest rates will directly cut housing prices *and* increase our debt payments to an unpayable level. So we’re basically stuck at the bottom. We have no more crank to twist to get the economy going, and we’re sure not going to be raising rates significantly any time soon.

  9. Here in New York City, prices are still insanely over-inflated. There’s no reason a small patch of land with some bricks on it should cost close to a million dollars in one of the “cheaper” boroughs. I don’t care that every hipster and European want an apartment here, at some point in the near-to-not-so-near future, the whole crap game is going to fall apart. It’s a completely unsustainable fantasy to think that you can get away with this hyped-up sense of “value” and “investment” based purely on desire. When no one who does any real work can afford to live around here, they won’t. At which point, all the rich people will be left with their zillion-dollar luxury apartments, which won’t be worth diddly squat because they priced the rest of NYC out of their town.

    What the above graph has to do with any of that, I don’t know- other than, it’s a pretty useless indicator of what’s going on in my city, or any city like it. We have not felt any real recession effects around here, and I’m sure we will. Until then, you’re insane if you think buying a house around here is some kind of a good investment.

    1. It’s a matter of demand. House prices in NY (and other cities; I live in Amsterdam which isn’t cheap either) are insanely high because so many people want to live there, and there just isn’t all that much room for that many people. If you think it’s too expensive, go live somewhere else. Don’t want to do that? Then you’re part of the reason why prices are so high.

      The only reason why housing prices in such popular cities would ever drop are if either the cities cease to be popular, and everybody moves away, or everybody’s income drops by a significant amount. Then some people will be forced to sell their homes and move out of the city, other people will buy those houses at reduced prices, but when adjusted for the new, lower income that everybody has, the house prices will still be insanely high. Because it’s still a popular city.

      The only way to make the house prices drop is to make the city suck really, really badly.

      1. Sure, I get the idea of supply and demand. All I’m saying is that people are shooting themselves in the foot that way- because supply and demand isn’t ALL there is to a city. Like any living organism, it still needs to maintain a fragile balance of many parts working together to create a healthy system. When the discrepancy between rich and poor becomes too large, the whole thing will burst. I have a really good deal in a “working class” neighborhood not in the main city; between that and the kind of work i do, there’s no reason for me to move right now. But start changing some of those factors, and yes, I’ll be leaving there, too. But I’m a renter- there’s no way I am going to plunk money down on any piece of property unless things tank in a major way, partially because it’s a dumb investment, and partially because I refuse to feed into the madness of this imaginary demand. Part of the reason people want to live here is because there is good work and it’s a cool city with things to do… but the other part is purely the NYC-hype-lifestyle that affluent people believe they need to have of dining out every night and spending most of their time at trendy bars. That’s the part willing to pay whatever greedy real estate agents can get away with, and that’s the part that’s going to sink the boat in the long run.

  10. Housing prices are not going to “recover” (inflation adjusted) to the bubble levels. Not ever. At least I hope not.

    Homeowners who are underwater, and banks holding overvalued mortgages, need to suck it up, cut their losses, and move on.

    Neither group deserves a penny in bailouts from those of us who saw the bubble coming and acted prudently.

    1. Amen. Wall Street is to blame for Wall Street’s behavior; we’re to blame for ours. All my life everyone around me has been living on credit, way beyond their means, believing they deserved the same lifestyles of the tv characters they watched. I hate to say it, but we’re still doing so and we’re still asking for an even bigger can of whoop-ass to come crashing down our door soon. Save your pennies now, kids.

  11. I think a more interesting, and revealing, way to look at this would be to take the inflation-adjusted housing cost, and plot it relative to adjusted minimum wage (for those years when minimum wage existed), as well as average income and median individual income for the bottom 95% of wage earners. I suspect it would tell a much different story.

  12. Houses have indeed gotten huge. The homes in Levittown for example, that first model for the American suburb, were 900 sq. feet. And build at a time when the average American family had 4.5 members in a home. How homes average 2500 sq. feet, and the average household size is 2.5.

    Yeah I currently live in a space that is much bigger than what I grew up in but it all gets used as both myself and my spouse need home offices. My commute 4 out of 5 days a week is amble down to the basement in my jammies to the vpn connection because that’s cheaper than fuel for a 20 mile drive every day and there isn’t any office space for all the IT staff anyway.

  13. This might very well be the case for homes that are purchased.

    But that skews a bit the affordability of homes in the different eras. Here in California now, homes are now very much outside the price range of most people not making a very good income (or willing to go into very deep debt).

    My family has been in California for generations, however. Mostly farmers or blue collar workers, and everyone owned their own home.

    Because they didn’t buy. They built it themselves. Land prices were much, much cheaper, especially in comparison with now.

    The house my dad’s parents built is now worth about $1,000,000+. Because it was built on what was then very rural land but is now very expensive neighborhood.

    The ability to purchase land for cheap and build your own home is almost entirely out of bounds, not simply for the costs but also because of building codes that make home building a professionals only business (for the most part).

    Poor people who could go West and build their own homes on cheap or free land (homesteaders) no longer have that ability, thus making the market for homes entirely limited to purchasing, which excludes many people for a variety of reasons.

  14. House prices stay roughly the same, when adjusted for changed house prices.

    (I won’t mention the 1001 different ways to decide on what the inflation number is, and governments probably having used all of them between 1890 and now.)

  15. “According to Case-Shiller/S&P, US housing prices have fallen to levels not seen since the 1890s…”

    Uhh, they don’t say that… That graph shows that prices fell to a level not seen since 2000 (you’re only 100+ years off, though, so no biggie).

    The far more significant feature of the graph is that it took until the 2000s for prices to finally rise above (and then vastly exceed) a level not seen since the 1890s.

    Also… prices haven’t fallen to “1890s levels” anyway. According to that graph, they are still about 30% higher than 1890s levels–even if they just happen to be at the same level of one very brief point in the 1890s.

  16. The only true wealth is productive land. Everything else is poker chips and monopoly money, only valuable as a marker against the value of land that can support life. That’s why it’s called “REAL” estate.

    The only time the value of productive land goes down, is when there is a massive die-off, such as in the Black Death of the 1300s in England. There’s a fundamentally limited amount of land that can support human life, so as long as the population keeps growing, that land keeps getting more valuable, because nobody is making the planet physically larger in response to demand for more lebensraum. At one time, we were increasing the ability of marginal land to produce – but that trend is now reversing due to pollution and economic factors.

    If you forget these basic facts, you can do all kinds of math with all kinds of formulas and “prove” anything you want. But the human value represented by money is based on the costs of food, water, and land – and the cost of food and water is largely determined by the cost of productive real estate, because that’s what the food and water sellers are paying down.

    These facts are like runaway trucks; if you refuse to believe they exist, you will just increase your chances of being flattened.

    Houses are just fancy tents. You can make a livable house from stuff you drag out of dumpsters. It’s the land under and around the houses that has potential value. We barbarians know these things you civilized people forget ^-^ !

  17. Am I missing some incredible economic argument for renting? Keep in mind that I don’t plan to lead a nomadic existence: I’m stable where I am.

    The reason I bought a house is that I just couldn’t understand paying more than the monthly payments on a mortgage and get nothing back if I should decide to move. I mean, the landlord has to pay a mortgage, right? Unless they own the house outright. And even then I can’t imagine that my house would rent for less than I’m paying in principal and interest now. I’d have to pay utilities whether I rent or buy, and upkeep on this house hasn’t been anywhere near what I pay in utilities, let alone P&I.

    1. I’m not nomadic (yet), but renting does give me a lot more freedom. I used to own a house, the monthly payment was higher than my rent and I had to pay for anything and everything else. Knowing that you will have to come up with $20K you don’t have to do maintenance on a house that is losing value and already worth less than the mortgage is a shitty feeling. Suddenly discovering you need a new water heater really fucking sucks. Having to take time off work to deal with plumbers or pest control or the cable guy really fucking sucks. Finding out a tree on your property has blown over and smashed into the neighbors will ruin your vacation and cost you $2000 to clean up.

      Now, I pay rent and live in a nice old building that has maintenance staff. Shit breaks, they fix it. I have nothing to worry about except paying my rent. I can move for any reason at any time and with minimal hassle.

      I used to imagine my house was like a giant savings account I lived in. Then I had to move and began renting it out while simultaneously renting a house with some friends. I soon realized just how much a house was actually costing me to “own”. Getting rid of it has cost me still more money and fucked my credit score, but it was absolutely the right financial decision.

  18. The Economist magazine has just shown that house prices here in Australia are the most expensive in the world. What is scary is that we are still where the US was 5 years ago. The common wisdom is that prices will just keep going up, people just don’t seem to realise that there is an upper limit, based on the ability to repay a mortgage.
    Of course, when you point to the US or Ireland, the response is “but it’s different here”

  19. This is why we need Henry George style LVT (Land Value Taxation). End the speculative bubbles.

  20. People keep telling me “It’s a great time to buy, we’re at the bottom!”. Funny how every one of these people are either realtors or have a vested interest in real estate. I’m holding off until prices are back to 3x the median income in my area. Right now we’re still looking at about 4.5x, and this is after falling 20% from the peak in 2007.

  21. I think it’s GREAT that house prices are falling.

    40 years ago a (beatnik-style) Midwest-city rent was $60/mo. That’s $330 in today’s money. Good luck getting anything but a broom closet for that.

    The WW2 gen is gone. The 100M baby boom is retiring. When they’re gone, there’ll be housing left and right again. And people who rent will be able to afford a life again. Hurrah!

  22. The idea of a home as an “investment” has had perverse impacts all across society. It leads people to discriminate against minorities to “protect their property value.” It leads people to move into those squalid gated communities. It leads people to oppose any kind of improvements in their area because it might hurt their resale value. And it prices housing out of the reach of millions and makes the homelessness problem worse.

    So I’m with all the folks saying prices need to fall a LOT more. I have a home I couldn’t touch for three times its price in California.

    Oh, and all the folks who walked away from underwater mortgages merely because they didn’t want to pay more than the house was worth? Hold them responsible for the full debt. If you total a car you don’t get off the loan just because the car has lost its value. Put it on their credit rating.

  23. I can think of exactly one sense in which owning a home makes sense as an “investment:” if I’m still living there when I retire, I won’t be paying rent after I leave the workforce. This assumes the alternative was to rent the same home (rent is necessarily more expensive than upkeep+property taxes, or either the landlord would sell or the home would be in disrepair). For the decades in which I pay off my mortgage, that money that would have otherwise gone to pay rent instead serves double duty as retirement savings, by reducing my needed income in retirement.

    The rest is just games on paper, shuffling funds from column A to column B. I a pile of bricks to keep out the cold is no more valuable today than it was yesterday.

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