Housing is generally the biggest asset on people’s balance sheets. Those with money tend to own homes, and home owners are generally deeply invested in their houses. For many years, housing prices rose, and these price rises made major contributions to the middle and upper-middle class’s asset base.
Those who owned houses during this boom benefited with increased wealth, but the rise in home prices also made it more expensive to buy a home. Up until the 2008 crash, many of the families who were not able to get in on the housing market “at the ground floor” made their way in by using a range of new debt products that a booming financial market was offering. It became easier to purchase a home with no downpayment. People could get bigger mortgages if they agreed to gamble on adjustible-rate mortgages. Eventually, some people didn’t even need documentation to get a loan. Once credit got that loose, it was only a matter of time before some major problem emerged.
When the housing bubble eventually burst in 2008, both lenders and consumers became more reluctant to buy new homes. The market dried up and housing prices crashed. Presumably, this crash meant that more people could get into the housing market, although it might have ultimately hurt the wealth accumulation of home owners.
How much did housing prices fall? How much affordable did houses become? How much damage did home owners have to absorb? One way to address these questions is to look at changes in housing affordability over time. The figure below describes changes in the Case-Shiller price index.1 The index measures home prices in 20 metropolitan areas, and expresses itself as a relative price level to that which prevailed in January 2000.2
In 2014, housing prices were about 65% higher than in 2000. This represents a modest recovery of about 19% from the trough in housing prices in 2011. However, it still represents 10% lower prices than those that prevailed at the peak of the housing boom in 2006. So housing prices have not recovered. Homeowners who bought near the peak of the last bubble are still in the hole, and those who were counting on home values returning to their 2006 levels are still behind in their financial plans.
The graph also imparts a sense of the 2007-9 recession’s impact on home prices. Home prices fell by about 24% from the 2006 peak to the 2011 trough. That is a considerable amount of lost wealth, particularly because homeowners are generally deeply invested in their homes.
Regardless of the ups and downs of recent years, housing is far more expensive than it was thirty years ago. Prices in 2014 have more than quintupled over the past forty years. Meanwhile, incomes have not.
- Data from Federal Reserve Board (2015) “S&P/Case-Shiller U.S. National Home Price Index©” Data series CSUSHPISA downloaded June 9, 2015. https://research.stlouisfed.org/fred2/series/CSUSHPISA↩
- S&P Dow Jones Indices (2015) S&P/Case-Shiller Home Price Indices: Methodology Methodological report.http://www.spindices.com/documents/methodologies/methodology-sp-cs-home-price-indices.pdf?force_download=true↩