Robert Shiller on the history of home prices


The late nineteenth century and early twentieth century saw many local bubbles surrounding the building of highways, canals, and railroads, bubbles that do not show up in the national numbers on our chart. Obviously, it is plausible that the land surrounding such construction projects would suddenly become valuable. Even in days gone by, when land was so abundant that one could buy it, in some places, for a dollar an acre, there could be real estate booms. If land prices were to go up to two dollars an acre near a new rail line, an investment could double in value, and this prospect could be quite exciting to investors. Regional real estate booms are nothing new.

The sharp fall in home prices after World War I probably had something to do with the great influenza pandemic of 1918–19, which infected 28% of Americans and killed 675,000 of them. This epidemic caused people to stay at home and not look for new homes. It must have damaged the economy and also distracted attention and conversation away from the housing market. There was also an unusually severe recession in 1920–21.

It is notable that there was no boom in home prices to accompany the sharply rising stock market of the Roaring Twenties. The famous Florida land bubble of the 1920s was not big enough to show up in these national numbers. Home prices were not carried along by the stock market and did not overshoot, nor did they drop when the stock market crashed starting in 1929. There was, however, a drop in nominal home prices after 1929; that is, home prices fell at just about the same rate as the Consumer Price Index fell. The drop in nominal home prices, when mortgage debt was not indexed to inflation, gave many homeowners negative equity in their homes and an incentive to default on their mortgages. In addition, the high unemployment rates during the Great Depression meant that many could not renew their short-term mortgages and so were forced to default on them and thus lost their homes. But we should not mistake the housing crisis of the early 1930s for a decline in real home prices. Real home prices showed remarkable stability over the whole boom-and-bust cycle of the stock market surrounding 1929.

This brings us to the most significant episode in the national home market until recent times: the sharp home price increases associated with the end of World War II. It is clear that there were large real home price increases at least in the big cities at this time, although the exact magnitude of the increases may not have been well measured.

This does not appear to have been a runaway speculative boom. Home prices did not overshoot their new postwar equilibrium, and they did not have to come crashing back down. Newspaper accounts of the housing market did not use the term housing bubble, nor did they feature stories of crazy homebuyers buying just about anything to stay ahead of the curve, like those we were reading about in the early 2000s. The story that one gleans from the newspapers just after World War II is quite different.

Government restrictions had severely limited the supply of new homes during World War II. After the war, returning soldiers wanted to start families; they were about to launch the Baby Boom. Prices of existing homes actually started increasing after 1942, before the war was over, probably because people anticipated the shortage of housing that was to follow. But, even though demand soared after the war, there was no real buying panic, as the conventional wisdom of the time was that construction would soon greatly increase the stock of available homes.

The Servicemen’s Readjustment Act of 1944, also called the GI Bill of Rights, immediately introduced the subsidization of home purchase for seventeen million people. This major government subsidy did not go away, and it helped lead to permanently higher home prices. But it did so in the context of the solidarity of the American people, and it never ignited a speculative atmosphere. President Franklin Roosevelt said that the GI Bill of Rights gave “emphatic notice to the men and women of our Armed Forces that the American people do not intend to let them down.” The people who bought at the high prices right after the war were those who felt that they could not wait to get settled in their new homes, not people who were speculating that prices would go up even higher. Other people simply found a temporary place to live and waited for the expected decline in home prices (which never came) or for their savings to increase to the point that they could afford housing. The fact that, after World War I, real home prices had gone through a protracted period of decline must also have served to diffuse any speculative worries. People must have remembered that episode in the aftermath of World War II. A widespread worry then that the Great Depression of the 1930s would reappear after the stimulus of the war ended further deflected any worries that home prices would soar.

It appears that people were for the most part not afraid of being priced out of the market, and that they did not fully anticipate the home price increases to come. They counted on new construction to prevent any severe price rise—and indeed, construction of new homes rose from 142,000 homes built in the United States in 1944 to 1,952,000 homes built in 1950. Even though this massive increase in supply did not stop price increases, the popular understanding seems to have been that it would.

It has been different in this century. We are increasingly feeling worried and vulnerable, and the market volatility that flares up from time to time, in both the stock market and the housing market, reflects this. Before the post-1997 boom, there were a couple of false starts (failed launches, so to speak), one in the late 1970s and one in the late 1980s. These were actually regional booms that did not extend so much to the nation as a whole. The 1970s boom was mostly confined to California, and the 1980s boom occurred on both the west coast and the east coast.

Figure 3.2 shows the path of real home prices for four U.S. cities. Prices in Boston and Los Angeles have gone through two dramatic swings, and at the end of the sample period shown, prices were soaring. But, in sharp contrast, prices in Miami and Phoenix completely missed the first of these two booms. Boston held much of its value increase—in 2014, remaining over twice its 1983 real value— but Miami and Phoenix hardly changed at all in real value between 1983 and 2014.


It is commonly said that there is no national home market in the United States, only regional markets. There is something to that statement, but it is not completely true and appears to be getting less true. While many markets in the United States had been highly stable and trendy, there were enough markets that were moving rapidly by the mid-2000s that the national series began to show signs of life, and it continues to be lively.

The period of home price increase starting in 1998 in the United States was concentrated in some states and metropolitan areas, and where it was concentrated, there were many stories about the psychological correlates of the boom. Stories abounded in the U.S. during the bubble years 2000–2006 of aggressive, even desperate, bidding on homes, of homes selling the first day on the market for well above the asking price, of people buying homes in a rush to beat the market—homes that they had sometimes hardly even had a chance to look at. People were afraid that the price of housing would soon rise beyond their means and that they might never be able to afford a house, and so they rushed to bid on homes. But, in other cities, where there was not a history of home price volatility, there were few such stories, and investors were relatively less reactive to home price changes.


  1. Shiller, Robert J. Irrational Exuberance. Princeton: Princeton UP, 2016. Print. 23-26



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