Inflation Adjusted Home Prices

Among the recent comments were a couple of requests to publish an inflation adjusted version of home prices; the chart show the S&P/Case-Shiller 10 City index and the same index adjusted for inflation with the U.S. CPI.  The adjusted series was rebased to have the same value as original series in January, 1987.   The adjusted series is in “real terms” meaning that the effects of inflation have been removed and the prices index is a better measure of the true changes the value of homes since 1987. 

Inflation Adjusted Home Prices

Inflation Adjusted Home Prices

In real terms, prices rose less and fell more. The real series peaked in December, 2005, up 90.3% from the beginning of 2000.  In contrast, the unadjusted (or nominal) price index peaked six months later in June, 2006 with a gain of 126.9% from 2000.  The difference reflects both the slight difference in the time frames and inflation.  On the way down from the peak, the real series fell more; in effect inflation made houses seem a bit more expensive than they really were.  From its peak the realseries fell 40.1% to a recent low in Apri, 2011.  The nominal index made its bottom much earlier in April, 2009 after falling 33.5%.

Despite the differing numbers,  the general picture of boom and bust is roughy the same.  Over brief periods of a year or two in an environment of low inflation the differences between real and nominal aren’t very dramatic. However, the real data shows that the damage from the housing bust is slightly worse than when seen through inflation tinted glasses.

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One Comment

  1. Ed Hamilton says:

    I applaud this appearance of Inflation Adjusted Home Prices by S&P/David Blitzer!
    This assertion is certainly the case: “Over brief periods of a year or two in an environment of low inflation the differences between real and nominal aren’t very dramatic.”. But over substantial periods, the difference has been very dramatic.

    This 8/27/2006 NYT U.S. National price chart includes pre-1987 real prices sourced from Robert Shiller:
    http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html
    The NYT wrote: “Two gains in recent decades were followed by returns to levels consistent since the late 1950’s.”.
    I elaborate: real home price was unchanged over 1958-1998, but CPI-U (nominal price) increased by a factor of 5.6!

    Also see the third Comment here:
    http://www.housingviews.com/2011/08/30/nationally-home-prices-went-up-in-the-second-quarter-of-2011-according-to-the-spcase-shiller-home-price-indices/

    I’d like to offer a nomenclature suggestion (to us all!), for cases where bubbles are reckoned: ‘price’ (nominal and real) is what happens in the marketplace; ‘value’ is reckoned price IF there were NO bubble; ‘mispricing’ is the difference.

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