US House Prices: A Rollercoaster

The funny thing about those overpaid "financial engineers" of Wall Street: they built "risk models" to support their securitization of mortgages without bothering to actually gather any data. They extrapolated a brief 10 period run-up in prices into a story of eternal ever-rising house prices and therefore could justify giving out NINJA loans on the basis of renegotiating the mortgage every few years to extract more "value" out of the house as cash in the pocket of a generation turned into speculators. Here's the result:

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From an article in the Christian Science Monitor:

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.

Now as we are well aware, real home prices began to swell in the late 1990s reaching a peak in 2006 after having increased by over 80% nationally and even much more in some of the more frothy markets representing a massive and abrupt deviation from the long-run norm.

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.

It is hard to believe but Wall Street pays these "financial engineers" salaries in the multiple hundreds of thousands (I'm guessing that with their "bonus" thrown in I would think they average around $400,000 a year and the real "hotshots" earned well over a million a year) and these "smartest guys in the room" didn't bother to do the research to find historical house prices and build models even remotely connected with reality. Instead they busily laid the foundations for the Great Recession and patted themselves on the back about their genius. Now everybody -- but them and their overpaid bosses in the Wall Street banks -- are paying the price for their egregious "smarts".

The tragedy is that nobody has been punished for this horror story. Consequently there is no inhibition to re-creating this same story in yet another bubble. Why would you bother to get a gun and rob the corner store when you can pocket millions and destroy an economy and walk away scot-free?