Time to Buy a House Yet?

No.

Or most likely not. Probably not...

Here's a graph comparing Phoenix's real estate price index for the past 16 years with the rate of inflation:

(Data from Case-Shiller/S&P)

Two things to note:

1) The value on the left axis is an index of real estate prices in the Phoenix area, with January of the year 2000 set at 100. In other words, If you paid $100,000 for an average house in January 2000, it likely peaked around $227,000 before being worth, on average, about $117,000 as of January 2009.

2) Real estate price changes don't always match inflation changes, but over longer periods of time they do. For example, if inflation is 3% per year over 30 years, you could bet with some certainty that the price of your house probably rose, on average, about 3% per year over those 30 years. That's why it's at least somewhat important to compare real estate prices to the rate of inflation.

So since real estate prices have historically hovered around the rate of inflation, one could make a reasonably educated guess that Phoenix prices just have a little further to go until they're where they "should be" (matched up with the shaded, dark blue section at the bottom of the graph).

Here's the same graph for DC:


If you look to the current year at the far right of the graph, you'll see that DC is still technically (and I mean technically) more overpriced relative to inflation than Phoenix.

The fun part is figuring out the large number of reasons this is the case. But I'll leave that for another time...


And this one is a composite of 10 U.S. cities (Specifically an average of Boston, Chicago, Denver, Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, Washington DC):

Keep in mind the baseline inflation rate (the shaded blue portion on each graph) is basically an average home price from 1993 & 1994 multiplied by the rate of inflation - Or what you'd expect a house you bought in 1993 to be worth each year if it appreciated at the inflation rate.

According to my little inflation-baseline model here, real estate prices in these 10 major markets are, on average, overpriced by about 42%. That's pretty substantial. (...And for those of you who noticed the incorrect graph that was in this place first... Forget about that one!!)


So... Time to buy a house yet?

Probably not.

Although it is far cheaper to buy a house now than it was in any of the past 4 years, we've still got a long way to go before real estate is back at that inflation-adjusted line. There's no indication that prices are done falling, and, on top of that, bubble prices coming back down to earth often overshoot their "fair" prices.

So even if you think waiting a few more months will get you a good deal on a house (prices will be even lower for rest of this year than they are now), there's a very good chance waiting even longer (let's just guess the beginning of 2011) will let you buy close to the bottom.

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But who knows? Even though I still believe pretty strongly that it's never a good idea to buy a house, maybe I'm missing something in this post... Like, perhaps, hundreds of billions of dollars of government home purchase subsidies...