Back in 2007, near the top of the bubble, Robert Shiller, the economist from Yale and co-inventor of the Case-Shiller Housing Index was asked about the notion. He found it equally perplexing. From 1890-1990, he said, the return from residential real estate in the U.S. was nearly flat after inflation, showing appreciation of approximately 3% per year. From 1997-2007, he conceded, the pace had quickened, averaging a 6% gain per annum. Not to worry though, housing was about to revert to the mean he added. But he cautioned that wasn't a prediction, but a cool analysis of the historical record.
He should have called it a prediction.
From the blog Calculated Risk, the following:
This graph shows the price to rent ratio (Q1 1997 = 1.0) for the Case-Shiller national Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.
Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is maybe 85% complete as of Q1 2009 on a national basis. This ratio will probably continue to decline.
This graph is based off the Case-Shiller national index, and the Census Bureau's median income Historical Income Tables - Households (and an estimate of 2% increase in household median income for 2008 and flat for 2009).
Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 10% or so. A further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes.
The reversion toward the mean has been swift and brutal. Having reached bubbly heights, the tendency of all asset classes to revert-- in this case housing-- has held true. It is still falling despite any talk you hear about "stabilization" or "green shoots".
Housing as "an investment"? Take T-Bills/Notes any day.
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