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April 14, 2013

Is There an Upward Slope to Real House Prices?

Calculated Risk disagrees with Robert Shiller:
Shiller and the Upward Slope of Real House Prices, by Bill McBride: Professor Robert Shiller wrote in the NY Times: Why Home Prices Change (or Don’t)
Home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor.
Shiller's comment on the stability of real house prices is based on the long run price index he constructed for the second edition of his book "Irrational Exuberance".
As I've noted before, if Shiller had used some different indexes for earlier periods, his graph would have indicated an upward slope for real house prices. Here was an earlier post on this: The upward slope of Real House Prices. ... The indexes I used captured a larger percentage of the market than the indexes Shiller used.
Tom Lawler has also written in depth about this: Lawler: On the upward trend in Real House Prices. ...
A key reason for the upward slope in real house prices is because some areas are land constrained, and with an increasing population, the value of land increases faster than inflation. ...
The bottom line is there is an upward slope to real house prices.

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