The housing price conundrum | Current Economics | Finance & Capital Markets | Khan Academy


Until about 2006, if you talk
to anyone, especially real estate agents, they’d always
tell you that on average, nationwide, that housing always
goes up in price. There could be layoffs. And maybe oil drops off and
people have layoffs in Texas, so housing prices go
down in Texas. Or they have layoffs in
Michigan, so housing prices go down there. But nationwide, housing prices
do nothing but go up. And that, for the most part, has
been true since the Great Depression. Housing prices have been going
up, maybe 1% or so per year. Actually a little bit less in
real terms. But something fundamentally amazing happened
in the beginning part of this decade. I have right here, this is
the Case-Shiller index. And this is probably the best
estimate of housing prices I can find. This is better than the
median, because the Case-Shiller actually tries to
compare the price you pay for the same house. And maybe I’ll do another
video later on how they exactly do that. But if we look at the
Case-Shiller index. Let’s see, in 2000 — that’s
where they index it to — a house that cost, you know,
$100,000 in 2000. Or, the index was at
$100,000 in 2000. By 2004 houses nationwide —
this is the national index right here — nationwide, prices
had increased by 46%. And by 2006, where they peak,
they had increased by 88%. They had almost doubled since
the price in 2000. And so the obvious question
is, why did this happen? What drove prices to
increase so fast? When really, for most of the
history of America, housing prices have never increased
this fast. Especially considering what was happening
in the broader economy. What do I mean by that? Well for the price
of anything to increase, what has to happen? Well the demand has to increase
faster than the supply, right? So let’s look at possible
theories. What are demand drivers
that could make housing prices go higher? Let me write that in green. Demand drivers. Well maybe the population grew
faster than the housing stock? When I say the housing stock, I
just mean that we’re saying just demand. So let me just say population. Housing stock is supply. So population goes up. That’s a demand driver. What’s another demand driver? Incomes go up. Right? That’s another reason. Maybe if a lot of people just
become a lot richer, they’re willing to pay for houses. And what are the
supply drivers? Well these are just
new homes built. So if you buy the classical
supply-demand argument, why housing prices increased by 40%
from 2000 to 2004, or why they increased by 80% from 2000
to 2006, these dynamics should have grown faster
than these dynamics. So the population — or maybe
the total income, if you took the population and incomes–
grew faster than the new homes built. So let’s see if that’s true. So I found this New York
Times article. And you could do some Google
searches, and I’m sure you can find probably better data. This is just me doing a very
fast search on this stuff. Let me see if I can get it up. OK, here it is. So this is from a New
York Times article. This is a little graph. And this is showing the average
of incomes reported on all tax returns. So notice, from 2000 to 2004
the average reported actually went down. It actually went down
from 2000 to 2004. And this is interesting. Let me see if I can bring
this in here. So here they say total reported
income in 2004 dollars — so they adjusted for
inflation — fell 1.4%. But because the population
grew during that period, average real incomes declined
more than twice as much, falling by $1,641
a year, or 3%. So what are they saying? They’re saying the total income
fell by 1.4%, but the population must have grown by
about 1.5%, and so the average per capita was 3%. So let me write that
in summary. So what do we know? What happened? We know from 2000 to 2004 — and
this is nationwide — we know that the population
increased by roughly 1.5%. So not by much. I mean this is over a
four-year period. So per year, it was growing
by less than 1%. And then if you go to the income
per person, or actually this is probably, well, this
is income for tax filing. But that’s a pretty
good proxy. Income for tax filing,
that declined by 3%. So the total money available,
that New York Times article just showed us, actually
declined. By, what did they
say, by 1.4%. So the argument that somehow
there’s more money out there, chasing the same number of
homes, or a slightly larger number of homes, doesn’t really
carry much weight. But let’s just make sure. Maybe for some reason, maybe
houses were destroyed. Or the number of homes built
just didn’t keep pace with this population increase. So let’s see what data
we can find on that. Well actually I found
this thing. This says that — this was
in 1999 — they say the composition of estimated 115
million housing units in the United States. So we can say, roughly, that
in 2000 that there were 115 million housing units. So let’s see. Over this time period,
roughly how many housing units were built? What percentage did the housing
stock increase by? And I found this data here. And this is annualized new
home builds by year. And I’m not going to go through
all of the math. But if you see — let’s see,
if I go back to 2000. I know this might be hard
for you to see. But if we pick up pretty much
any month from 2000, 2001. This is in thousands. So on an annualized basis,
maybe 1.5 million homes. This was in 2000. But it started accelerating,
all the way to 2004. By 2004, we were building
roughly 2 million homes a year. So over that time period, we can
say, on average — you can work the numbers to get an exact
number, but it should work out — we were
building about 1.8 million homes a year. And we can assume that homes
destroyed were pretty negligible. I’m not aware of most
neighborhoods where they were bulldozing homes. If anything, they were just
renovating homes. But these are brand new homes. So over that four year period —
and I’m just going to focus there because that’s where we
got data from that New York Times article — how many
homes were built? Well, 1.8 times 4,
that’s what? So roughly 7.2 million homes,
new homes, were built over that time period. And we started with
a base of a 115 million, roughly, in 2000. So over that time period, the
housing stock increased by 6%. So the supply of homes
went up by 6%. So what’s going on here? From 2000 to 2004 we built
a ton of houses. The supply of homes
went up by 6%. People’s incomes actually
went down, because we were in a recession. People were getting laid off,
or they were just willing to work for less. Income went down. And the population
barely increased. And if we look at the total
dollars that were being earned, that actually
went down. So the actual money out there
to pay for houses went down. And at the same time,
the total number of houses went up. But at the same time, over this
exact same period, the prices of houses
went up by 46%. Or, I forgot the number, but it
was 40-something percent. And it actually continued to
race up until 2006, where it went up 80% relative to 2000. So this is bizarre. Basic economics would tell
us that if the supply is increasing and the demand is
decreasing, prices, if anything, should come down. So what happened? So I’m going to let you think
about that a little bit. There you have the supply-demand
thing that would tell you prices went down. But not only did they not go
down, but they raced up faster than they’ve ever done in
history, in the history of the United States. So in the next video I’m going
to tell you, frankly, why I’m pretty sure housing
prices did go up. See you soon.

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