My Take on Housing Prices

I wanted to offer up some quick thoughts about my feelings on the current state of the housing market and most importantly where I think house prices are headed in the future. I clearly cannot predict the future and I think that in a world where American Idol is the most popular show on TV no one can. I mean don’t get me wrong I like it, but really.

The only way to try to accurately predict the direction of housing prices is to use the data we do have. I am going to look specifically at the areas of population growth, historical real estate prices, and the state of the economy.

Population

Population in the US and around the world is growing and as the saying goes, “God isn’t making any more land.” The United States Census Bureau estimates that between July 1, 2005 and July, 1 2006 the population of the United States grew by 2,891,423 people.

That is a population growth of approximately 1% a year. Using this estimate for every 100 people that live in your neighborhood this year there will be 101 next year. If you multiply that by the number of people that live in my neighborhood it turns out to be a significant increase. We are already packed in like sardines. All of these new people are going to need places to live.

The United States is pretty thickly settled and cities are overcrowded. The rate of new houses being built is not keeping up with the influx of population and because there are crowds of people fighting over the same houses, I am speaking in general here (it may not be true of your house if you are trying to sell), this is leading to a rise in real estate prices all over the nation.

Although there may be a slump from time to time, if we consider population as a lone factor, we should continue to see a steady rise in prices.

Historical Real Estate Prices

In the chart below are the historical median and average home prices all the way back to 1963. The data was provided by the United States Census Bureau. As you can see since the Census stared keeping track of this home price data it has been on the upswing.

There are a few notable time frames on the upward curve of the chart. Notice the drop in home prices between 1989 and 1992. According to the chart it looks as if home prices fell for a period of a couple years. This seems to be the biggest drop in homes prices since the Census started keeping track. Even so it does not look so significant when looking at the chart as a whole. Seems like a person that bought a home in 1989 just had to wait 4 years until 1993 to be able to be able to sell it for what he bought it for.

Taking this into consideration even if this is the biggest slump in history I doubt price will fall more than 10% during the slump. Even if they do it looks like all you have to do is wait it out. If history is any indication home prices will be on the rise again soon enough. There has not been a real estate bubble ever in the whole time period the Census has been tracking home prices and I don’t think one is likely in this case either. If this is anything it is a slight correction.

The State of the Economy

If you take a look at the real estate economy not everything is perfect, but there are signs of it turning around. Interest rates are still relatively low and the National Association of Realtors expects them to stay that way through 2008. According to the same source, existing home sales fell 8.5% in 2006, but are only expected to fall .9% in 2007. In 2008 the National Association of Realtors projects existing homes sales to actually be up 3.7%.

The National Association of Realtors also states that median existing home prices, after being up 12.4% in 2005 and only 1.0% in 2006, should recover a bit in 2007 and grow by 1.2%. In 2008 they see an even bigger turnaround with prices projected to rise by 3.1%.

Conclusion

With the population on the rise, history on our side, and the housing economy coming around I expect that this housing bubble that everyone fears will be a fleeting memory in a few years. If any of the current statistics above are correct then the current housing “bubble” will be much less severe than the one we suffered in the beginning of the 1990s.

I don’t expect prices to gain at a 10% clip like they were in the early 2000s either. Slow steady growth will be what is good for our economy and what I hope and expect to happen in the future.