Realty Bites

Which way are home prices headed? The answer is: nobody knows. Really. Nobody knows. Not even the experts. For one thing, prices aren’t an amorphous blob that all move in one direction, like an electorate. (Wait, no!) Just because a co-op on Central Park in Manhattan fetched a record price doesn’t mean a coop in Wheeling, West Virginia will sell for $10MM. And vice versa. The fact is, prices are very specific, right down to the precise location of your home.

So get an appraiser. In the meantime, the best we can do is look at large trends to get a general sense of where things are going.

Much hay has been made of a recent study by Robert J. Shiller, a professor of economics at Yale. (The charts below are prepared from the raw data he provides on the website for his book, Irrational Exuberance.) His work has attracted interest not only because Shiller is a well-known economist, but also because he shows that “real” home prices in the United States have risen at a much faster rate and to a much higher level than at any time in the last century. Perhaps real prices are headed for a large fall.

I don’t think you and I should be alarmed by his conclusions. It’s not that real prices aren’t important. They are — to economists. To an economist, it matters that your home is worth more only because the price of everything has gone up. But the rest of us are more concerned with how much we sell our home for than how much we sell our home for compared with inflation. The cold hard cash a buyer puts in our hands is primary. Therefore, we’ll be looking at “nominal” prices.

As we can see from the next chart, nominal prices tend to rise. (And notice how insignificant they make real prices look.) Since World War II, in fact, prices declined only four times. The first time was in 1958. Nominal prices fell for one year and then rose above their previous highs one year later. The next time was in 1963. Nominal prices fell for one year and then rose above their previous highs one year later. In 1990,  nominal prices fell for one year and then rose above their previous highs three years later. The only other time prices fell was last year.

What happens next? Well, the chart shows that the corrections gradually are becoming more severe. Perhaps this time prices will fall for one or two years and recover four or five years later. Some areas will be hit harder than others. Stable neighborhoods may see little or no decline. Marginal ones may fall as much as 40%. But on average, across the entire country, the impact should be small from an historical perspective. Hang in there, baby.

That would be my best guess. But, hey, yours is as good as mine.