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Stingy Investor Tip Sheet

Real Bubble

Robert Shiller produces a wealth of keen information and I recently downloaded his housing market data. It allowed me to recreate one of the most frightening graphs that I've seen recently.

The following graph shows the growth in U.S. home prices, adjusted for inflation, since 1890. (I've updated the data to the end of November 2008.) The blue line shows the housing index and the green line shows its median level of 107.

(click for larger version)

The graph shows the extent of the bubble and doesn't provide much comfort for housing bulls. Home prices will have to fall much further before reaching median levels.

A similar conclusion can be found by comparing home prices to median income levels as was done over here.

More importantly, investors should expect real estate to roughly keep pace with inflation over the long term.

02/20/2009   2:00 PM EST   Permlink   save & shareReal Estate

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