Delusions and Housing Bubbles

Humans love good stories and stories that promise great riches seem to make it especially difficult for us to apply the lessons learned from our past mistakes. The great internet stocks bubble of the late 1990s offered plenty of lessons as ridiculous valuations of worthless companies and billions of wealth were quickly wiped out. The housing bubble of this decade however shows the great  power that delusions have over supposedly rational human beings. The prices of houses over the last few years have gone through the roof and are now crumbling as they have clearly reached a level well beyond what is affordable for working people. It is amazing how many people believed that housing prices not only would never fall but actually could only go higher. Unfortunately, reality is quite different. As the chart above shows, the history of home prices adjusted for inflation going back to 1890 (based on research conducted by Yale University economist Robert Shiller) has a long-term trend growth rate of just 0.4% a year after inflation. This makes housing a poorer investment than stocks and bonds over the long term. I know it’s difficult but it would be wise for us and our wallets to remember this simple number the next time we hear that nice real estate agent muse over the unbeatable wealth that comes from owning real estate.