After the peak of the housing bubble in 2006, U.S. home prices fell for six years, until 2012. Are these memories getting a little hazy? The Federal Reserve, through forcing years of negative real short-term interest rates, suppressing long-term rates, and financing Fannie Mae and Freddie Mac to the tune of $1.8 trillion on its own vastly expanded balance sheet, set out to make home prices go back up. It succeeded. Indeed, it has overachieved. Average home prices are now significantly higher than they were at the top of the bubble, as shown by the S&P Case-Shiller national home price index.

If you already own a home, the price boom makes you feel richer. But if you are trying to buy, it makes homes less and less affordable. home prices rise not only faster than inflation, but faster than your income. So far, we have spoken of nominal home prices. But since the old 2006 peak, we have had more than a decade of general inflation, as the Fed strives for perpetual depreciation of the dollar’s purchasing power at a rate of 2 percent a year. The aggregate increase of the consumer price index from 2006 to 2017 was about 24 percent. We need to consider home prices on a real, or inflation-adjusted, basis.

From 1987 to 2000, the average inflation-adjusted annual increase in U.S. home prices was 0.3 percent. This 0.3 percent annual rate is the same as the very long term trend increase in U.S. real home prices, as calculated over the 117 years from 1900 to 2017, by the Credit Suisse global investment returns yearbook for 2018. In other words, in addition to giving you a nice place to live, it appears that over time on average, homes provide a good inflation hedge, plus a little, but not plus very much. After 2000, in real terms the housing bubble expanded and contracted quite symmetrically, bottoming out in 2012 just about on its trend line.

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