“I am a former CPA and auditor by training (and a former CFO). I have spent a lot of time since the financial crisis trying to understand what happened and I think your book is fabulous, but still not sure we had a “massive housing bubble”…

…The issue I want to address with you is your use of Case Shiller, its black box figures that can’t be tied to any government data/statistics (because of its proprietary assumptions), and your use of real vs. nominal home prices. It’s nominal that matter for the financial crisis relative to nominal mortgages.

So, instead I looked at two simple and well understood government data sources. HUD/FHFA’s well-established, national purchase mortgage index (which is available for free at their website). This index starts with Q1-1991 at 100. It peaks at Q2-2007 at 226.63 (which we didn’t have until well into the third quarter of 2007 and then it’s only a very modest decline).

So for my analysis, to keep my annualized appreciation simple…a full year, most of the time (I used the online CAGR calculator at Money Chimp for my calculations) I used Q1 to Q1 for comparisons.

Q1-1991 has an index of 100 and sixteen years later Q12007 (one quarter before the peak) has an index of 224.09. That’s annualized, nominal home price appreciation rate of 5.17% over that 16 year period (including the bubble and excluding the bust).

From Q1-1991 at 100 to Q4-2014 at 213.89 from before the bubble, through the bubble, and through the bust to prices rising again….you have a 3.25% nominal home price appreciation rate over those entire 23.75 years.

From Q1-1998 (121.33) to Q1-2006 (219.56)….you have 8 years of more rapid nominal home price appreciation….it’s 7.7% annualized. Also, from Q1-2012 (179.29) to Q4-2014 (213.89)….you have 2.75 years (so far) of more rapid nominal home price appreciation of 6.6% annualized. (These are both subsets of the longer periods above.)

So, we have 3.25% nominal, annual home price appreciation through bubble and bust. And 5.17% from 1991 up to nearly the peak of the bubble.

So then, I looked at The Federal Reserve’s B.101: “Balance Sheet of Households and Nonprofit Organizations” (from their website). I believe it is in nominal values.

If you look at the December 31, 1990 and the December 31, 2006, you have the same 16 year period in nominal terms as the 5.17% nominal home price appreciation figure above.

Here is some interesting figures. Nominal Household total assets were $25,684.8 billion ($25.68 trillion) as of December 31, 1990 and $79,796.1 billion as of December 31, 2006. That’s a CAGR of 7.34% per year for the 16 years (to nearly the peak of the bubble). Household real estate (homes) were $6,796.9 billion at 12/31/90 and $22,541.0 billion at 12/31/06. That’s a CAGR of 7.78% per year over the 16 years. So assets other than the home had a CAGR of 7.18% over those 16 years. The home was 26% of assets in 1990 and 28% at near the peak of the bubble at the end of 2006. (Doesn’t sound like a big bubble though, does it?)

Now all of these CAGRS are overstated because they are in total and we know that households and homeowners grew between 1990 and 2006. The government numbers I found had households at 91.9 million in 1990, 103.2 million in 2000, and 114.8 million in 2010. Also, the home ownership rate changed during this period. Based on what I found from the government, I estimated it at 64% for 1990 and 69% for 2006.

Based on these figures, I used 91.9 million total households and 58.9 million homeowner households for 1990 and interpolated 110.8 million total households and 76.45 million homeowner households for 2006.

Based on these figures, the average homeowner household (58.9 million) had a house worth a nominal $115,397 as of December 31, 1990 and a nominal $294,846 (76.45 million) as of December 31, 2006. That’s a 16 year CAGR (annual home price appreciation) of 6.04% (versus the FHFA’s 16-year 5.17% figure above).

If you exclude the home’s value, and consider just other assets (stocks, bonds, etc.) the full 92 million households had on average $205,303 of assets at December 31, 1990 and the full 110.8 million households had on average $516,743 at December 31, 2006. That’s a 16 year CAGR of 5.94%.

In other words, on a nominal basis per the Federal Reserve, the U.S. home appreciated in value from 1990 to 2006 at just about the same annualized rate as household’s stocks, bonds, and others assets.

In other words, while there may have been a mini-housing bubble in the 2000’s up to say mid-2007 (plus or minus), but it sure doesn’t seem that there was a massive bubble in housing…unless there was a massive bubble in everything else at the same time, does it?

Could this be why nominal home values and other asset values are rising so rapidly post-crisis (to near pre-crisis bubble levels) or do we have another bubble/crisis on our hands today?

Does this make sense?

Best, mike

P.S. I read somewhere that nominal personal income rose 5.4% from 1992-2002 and 4.0% from 2002-2012. I am not sure if this is in total or per capita or household. But I am willing to bet with all the talk about income inequality….that homeowners (who as a group are wealthier Americans) nominal incomes rose a lot faster than non-homeowners. Especially in markets like L.A where only the wealthiest 1/3rd or so can afford a home. In other words, I believe nominal income growth for homeowners was probably equal to or higher than the nominal growth in home prices of 5% to 6% (from 1990 to near the peak of the bubble at the end of 2006) that I show above. Another way of justifying the nominal home price appreciation from 1990 to 2006.

(Mike Perry’s April 7, 2015 email to Peter J. Wallison of the American Enterprise Institute and the author of the book, “Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again”)

Posted on April 7, 2015, in Postings. Bookmark the permalink. Leave a comment.

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