When exactly did the U.S. Even better, can you inform from the Case-Shiller Home Price Index when it started? Take a look for yourself. Could it have started in 1997, when house prices, after changing for inflation, bottomed? Could it have been around in 2000, when these real house prices exceeded rents? Or was it in 2003, when real house prices started growing even faster than that they had in the period from 1997 up compared to that point?
I asked Mr. Pinto why he selected 1997. He pointed to a chart of long-term home prices patched collectively by Robert Shiller, a Yale economist. Mr. Pinto is convinced misguided government efforts to market homeownership were mainly to be blamed for the bubble. He particularly points to the 1992 legislation that required the government-backed mortgage investors Fannie Mae and Freddie Mac to ensure more loans for individuals with shaky credit and an inability to make substantial down payments. That legislation created a poor regulator for Fannie and Freddie also.
For his part, Case-Shiller House Price Index co-creator Robert Shiller discovered 1998 as the beginning of the increase in U.S. The boom demonstrated its first beginnings in 1998 with real (inflation-corrected) home price raises first exceeding 10% in a calendar year on the West Coast, in the glamour cities San Diego, LA, San Seattle and Francisco.
The incipient boom then attracted only moderate attention since it was confined to the West Coast, and the cumulative price gain was still not dramatic. But the boom quickly spread east, with 10% one-year real home price increases appearing in Denver and then Boston in 1999. These populous metropolitan areas kept on appreciating at a higher rate. As years went by, new cities started seeing substantial real home price increases. The full total consequence of this succession of booms, in so many places has been a massive upsurge in nationwide home prices over a period of nearly ten years.
Shiller’s description provides us a concept of how rising house prices propagated across the U.S., but it generally does not really reveal when it changed from an area or regional trend into a nationwide one. Worse, the Case-Shiller House Price Index, alone, is not able to be used to identify if an financial bubble in the U.S.
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For an asset like houses, the income that could be realized from holding or owning the asset is called rent, for which Shiller utilizes the inflation-adjusted Owner’s Equivalent Rent measure produced by the U.S. Bureau of Labor Statistics. There’s a problem though when we adjust housing prices for inflation as is done for the Case-Shiller house price index. The Consumer Price Index doesn’t incorporate real changes in casing prices as time passes. You see the vicious circle! The Case-Shiller real house price index isn’t really telling us what we’d like to think it is. But what would be a better method for identifying whether house prices might be in a bubble?
Is there a way to identify a bubble forming in its earliest levels? We think we’ve developed a much better method, which is partly based upon our observations of income and age driven spending. What we found is that personal spending for housing was a very strong function of personal income.
We did that with median house prices and median home income in america since 1967. What we should find from our chart is that the U.S. 2000, with a definite deviation from the two in any other case linear trends that we observe in the data. What we should then suspect is that Tom Lawler’s basic theory of the casing bubble is appropriate, but his timing is off. People didn’t wait until 2002 to start pulling money out of stocks to put toward housing – they were only available in 2000, just as the stock market bubble started deflating.