Thursday, December 20, 2007

Charting the Housing Bubble

A chart that may help clarify some of the things I have been/will be saying about housing.

This chart shows the ratio of housing prices from OFHEO to the “owners’ implicit rent” from the BLS. Both are index numbers, 1982 = 1. This is more or less equivalent to the price-earnings ratio for stocks.

The red line shows the ratio for the United States as a whole. The blue line shows the ratio for the Los Angeles metropolitan area.

What the chart shows is that this decade we’ve had a national housing bubble that is somewhat bigger than the bubble in LA in the late 1980s — a bubble that was followed by a 20% drop in nominal home prices, and a 30% fall in real prices. In LA itself, and in a number of other metropolitan areas, the bubble has been on a scale completely unprecedented in modern experience.