Housing Price Crash

Preconceived notion: housing prices always go up.

Historically, this has indeed been the case (not unlike the stock market, with a generally rising trend).

1987	62.03
1988	66.67
1989	72.43
1990	75.58
1991	73.43
1992	74.30
1993	74.46
1994	76.46
1995	77.74
1996	79.61
1997	81.82
1998	85.71
1999	92.08
2000	100.00
2001	109.27
2002	118.00
2003	130.48
2004	146.26
2005	169.19
2006	188.66
2007	184.83
2008	159.17
2009	128.81

The numbers listed are the relative home price by year (in real dollars). The values can be viewed as percentages as compared against the value in the year 2000 (which is 100.00 or 100 percent), As can be seen by the numbers, by the year 2006, the value of this home had increased 88.66% over the value in 2000. This means that on average, a house which was "valued" at $100,000 in Q1 of 2000 would have been worth $188.66 in Q1 of 2007. As can be seen from the numbers, this type of growth is highly uncommon (the pre 2000 growth was closer to 1.5% per year).

So what happened between 2000 and 2007?

Fundamentally (economics), for value (price) to increase, demand must grow faster than supply.

What are things which contribute to

Increased DEMAND

Increased Population (Population increased ~1.5%)

Increased Wealth (Income) (Income/tax-filing decreased ~3% - dot com recession)

Increased Purchasing Power (Value of USD) (Above taken in real dollars)

Decreased SUPPLY

Number Homes Built (~6% increase over 4 years (2000-2004))

Number Homes Destroyed (Negligible)

As we can see, the wealth per person decreased, and supply of houses increased. Economics would tell us that prices would decrease, but over the four-year period from 2000-2004, the housing prices increased 46% (MUCH faster than historical values). Not only had this never happened in history (even if the days of fastest growth/wealth creation), it was happening during a recession.

Housing/Financial System

Hey:

In an effort to do a few things:

1) Use this blog more often

2) Better understand a problem, and

3) Document what I'm learning

4) Be informative

I've decided to do a series of posts on housing markets and the financial system. The majority of the content will be from Sal Khan at www.khanacademy.org/ - though I will include my "own" thoughts italicized as well as other facts, figures and relations I can bring from other sources.

Hopefully this will be informative, but if not, at least it will do 1-3.

Enjoy,