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The Myth of Home Price Appreciation

 
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Phil O. Math
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PostPosted: Sat Nov 24, 2007 7:38 pm GMT    Post subject: The Myth of Home Price Appreciation Reply with quote

I have had many people tell me that home prices rise, on average, 6% per year. Everytime I hear it I politely tell them it isn't true, that the historical average home price appreciation, in real, inflation adjusted terms, is less than 1%. Even if you don't adjust for inflation, the average home price appreciation would be nowhere near 6%.

Then they tell me "No, it's true - 6%".

I tell them that Yale economist Robert Shiller did a study of home prices in the US back to the 1880s and found that prices appreciated approximately 0.4% over that period. That's right, not 4% but .4%.

They say "No, it's 6%".

I tell them that in a section of Amsterdam economist Piet Eicholtz of the University of Amsterdam has accurate home price information dating back to the early 1600s and found that the average yearly real appreciation has been 0.2%.

They say "Correction, 6%".

Has anyone else heard this 6% myth? Why do you suppose that people cling to it so stubbornly even in the face of clear evidence to the contrary?
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PostPosted: Sat Nov 24, 2007 8:57 pm GMT    Post subject: Re: The Myth of Home Price Appreciation Reply with quote

Phil O. Math wrote:

I tell them that Yale economist Robert Shiller did a study of home prices in the US back to the 1880s and found that prices appreciated approximately 0.4% over that period. That's right, not 4% but .4%.


Not only was it an annualized 0.4% over the 100+ year period, but the bulk of that increase was due to the bubble in the first half of this decade. Without the bubble, it would probably have been another order of magnitude less (e.g., 0.04% per year).

Phil O. Math wrote:

Has anyone else heard this 6% myth? Why do you suppose that people cling to it so stubbornly even in the face of clear evidence to the contrary?


Would showing them some graphs help? I find Shiller's data very striking in that form:

http://en.wikipedia.org/wiki/Image:Shiller_IE2_Fig_2-1.png

Maybe a graph of Japan's housing market would help as well. Prices fell there in nominal terms for ~15 years. This graph is not inflation adjusted, but may get the point across anyway:

http://en.wikipedia.org/wiki/Image:EconomistHomePrices20050615.jpg

I know the common retort when someone brings up Japan is that the US isn't Japan. However, the point is that this disproves the assertion that housing prices must always go up over the long term, even nominally.

I would also ask how they came up with the 6% figure so that you could compare the data source with the Shiller's data, for instance. Chances are, if they actually have a data source, it is for a much briefer time period than Shiller's work. If they don't actually have a source for their figure, and they play the ostrich when you present them with actual graphs, there probably isn't much else that you can do for them. I wouldn't worry about it too much (unless they're in charge of your money) since some people just opt for strong decisiveness over accuracy.

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Phil O. Math
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PostPosted: Sun Nov 25, 2007 6:34 pm GMT    Post subject: Home Price Myth Reply with quote

Thanks admin, I appreciate the links. They may help, but I doubt it.

I posted this question in the psychology section because this issue isn't really about economics but rather about a psychological phenomenon - the persistence of mistaken beliefs despite overwhelming contrary evidence. I find it to be quite common even among people who are educated and successful.

Perhaps all I can do is point them to the data and leave it at that. Perhaps I've already done all I can. I just feel I could help them if I could get them to see the issue clearly, rationally and objectively.

Thanks again.
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PostPosted: Sun Nov 25, 2007 7:16 pm GMT    Post subject: Reply with quote

Psychologically, I think a big part of the problem is that there are people held up as experts on the subject who perpetuate the 6+% appreciation myth. Specifically, the National Association of Realtors and Massachusetts Association of Realtors spread this misinformation:

http://paper-money.blogspot.com/2007/11/daily-2-new-campaign-old-scam.html

http://www.gbreb.com/gbar/documents/NARFALL07.pdf

I tried looking up the "NAR existing home sales historic series" on which they are basing their claim of 6.6% annual appreciation, but you apparently have to pay if you want to see the actual data:

Quote:

http://www.realtor.org/Research.nsf/Pages/EHSdata

To purchase historic information e-mail your request to data@realtors.org. An NAR Research representative will get back to you shortly.


Off the top of my head, there are many obvious problems:

  • This is opaque data from the very people who are trying to sell you the product.
  • They don't show you the actual data behind the appreciation claim.
  • Most importantly, I am going to go out an a limb and say that it is unlikely that their data goes back nearly as far as Shiller's.


These are salesmen, not economics experts or investment professionals.

Psychologically, I think people have a tendency to think that there are "two sides" to everything, assume that they must have equal probability, and then decide to believe in the side that they like better. When you have the "experts" at the NAR saying that housing appreciates at 6.6% per year and you have other experts (like Professor Shiller) saying that appreciation roughly tracks inflation, I think people say to themselves "the experts can't even agree on this, so it doesn't really matter who I listen to, and so I'll listen to what sounds best to me." In reality, the existence of dissenters does not mean that their statements are just as likely to be valid. NAR members are experts at selling, but the question of appreciation is best addressed by economics experts.

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admin
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PostPosted: Sun Nov 25, 2007 7:49 pm GMT    Post subject: Reply with quote

Note: This is my second post in a row - don't miss the one above if you got here via an email alert.

I'd like to expand a little upon why the time frame matters so much. The most obvious reason is that the more data you have, the better your average is, given that anomalies get balanced out. However, there are also some specifics about the US housing market that will skew the average appreciation, depending on where your data starts.

First, if the data starts around the beginning of the 1940's, you will capture a large, sustained spike in real prices which resulted from the GI Bill. This spike can be seen on Shiller's chart:

http://en.wikipedia.org/wiki/Image:Shiller_IE2_Fig_2-1.png

Second, if the 1970's and first half of the 1980's account for a substantial portion of the data (which is probably the case), the nominal appreciation rate will be skewed quite a bit higher by the fact that inflation was high during that period. Inflation was well above 6% for much of that time period, and almost hit 14% at one point:

http://www.econbrowser.com/archives/2005/10/inflations_back.html

So the historical 6% appreciation figure could be due precisely to inflation being a good bit higher than that for a prolonged time. In other words, most of those "gains" were probably when prices on everything were skyrocketing, which makes the average useless given that inflation is significantly lower now (or so we are told). The 6% figure needs to be corrected for inflation so that it can be applied to today's financial environment. Think of the converse - if inflation were 14% now and the NAR said that nominal, historical appreciation was 6%, it would be sharply off-putting. Similarly, it is invalid to apply the nominal appreciation rate which was built during a period of high inflation with now when inflation is low. (Maybe you can rephrase this to be more clear - I'm not entirely satisfied with how well I'm explaining my point.)

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john p



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PostPosted: Mon Nov 26, 2007 3:09 am GMT    Post subject: Reply with quote

I see manipulation kind of like a mathematical function. A realtor can take a few numbers and say that they fit within a set and if you were to do more research and get more statistics they'd end up projecting out to this or that curve or shape. Who is going to take the time to gather more data and really plot the points? What do they care if someone does, they can discredit them anyway. If they are debunked, they play Mickey the Dunce. Playing Mickey the Dunce is like the President's hand. They say things like "Oh, well he acted on "good faith"" Which means that even though they didn't tell the truth, because they didn't mean to not tell the truth, they did and we all have to believe, or to use our faith. Can you see why the most manipulative politicians try so hard to get those that suspend reason for faith? If you put anything in a faith or patriotic wrapping paper, they'll eat whatever's inside. Who wants those pesky Massachusetts rationalists who sniff everything and ask annoying questions? How rigorous are people? How many points of data do certain people need before they certify the truth and pull the trigger? In the end, it isn't really about what an individual feels about their own personal risk disposition, but an understanding of the market's.
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