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Will Home Prices Continue Their Record-Breaking Climb?
November 15, 2021
Home prices in the U.S. have risen by a record-breaking 19.7% in the last year, according to the Case-Shiller Index of US house prices. Now one of the index’s co-creators is warning that such increases look unstable.
In a recent op-ed, Nobel-winning economist and Yale professor Robert J. Shiller warned that home prices could continue to increase for a while further, but that may be followed by “serious declines.”
The warning challenges the belief that, despite periods of volatility, housing is a safe long-term investment. This belief is buoyed by the housing market’s post-financial crisis performance. Nationally, real home prices fell by 36% from December 2005 and February 2012. Since then, prices have increased 71% and are above their 2005 peak.
Shiller argues, however, that the market’s post-2005 performance is not the only relevant example of long-term home-price trends. He points to historic data that shows real home prices, when adjusted for inflation, were lower in the 1990s than in the 1890s, as the intervening century saw cities expand out into cheaper land as well as technological advancements that made construction and transportation more efficient.
The pandemic has made remote work more common, allowing buyers to move from expensive urban centers to areas where land is more affordable.
He also points out that housing prices have risen much faster relative to construction costs, so the demand for existing homes is likely to diminish, bringing prices down.
Though he does not predict a crash, Shiller warns that people looking to buy now should be aware that there could be a “rather bumpy and disappointing long-term path for home values.”
