Chart of the Day: Housing Prices Since WWII

In what Matt Yglesias calls “the department of stuff people are wrong about,” the New York Times reports the following:





So here’s the question: why do people think that home price appreciation is a law of nature, when it so clearly isn’t? Here are a few theories:

  • People are really bad at math. A 10% annual rise over ten years is a 150% increase. That’s pretty crazy. But most people have no sense for how numbers like that compound.
  • People are bad at adjusting for inflation. If you bought a $20,000 house in 1947 and sold it in 1997 for $150,000, that seems like a tidy profit. In fact, it’s zero profit. Adjusted for inflation those numbers are identical. But despite all the complaining we do about inflation, most people don’t realize just how much it adds up to over the years. (It’s that pesky compounding problem again.)

    But what you don’t remember is that another neighbor lost money on his house (he didn’t crow about it, after all) or that the Southern California housing market cooled off in the 80s (and the Detroit market had been falling the entire time) or that your assessed value is basically just tracking inflation (the math is too hard) or that the Tokyo story was bogus to begin with (and the Tokyo property bubble collapsed shortly after that anyway). And you never even notice the occasional story that provides the big picture in the first place — partly because they don’t often get written and partly because they’re not very interesting even when they are. So we end up retaining lots of bits and pieces suggesting that housing prices always rise and downplaying or not noticing the news that tells us otherwise.

Add your own theories in comments. This really does seem like a belief that simply won’t die regardless of how much evidence there is to the contrary, and that’s something that’s probably distorted the housing market every bit as much as all the government intervention in the world.