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Current time:0:00Total duration:9:21

Video transcript

until about 2006 if you talk to anyone especially real estate agents they'd always tell you that on average nationwide that housing always goes up in price that you know there could be layoffs and you know maybe oil drops off and people have layoffs in Texas so housing prices going on Texas or they have layoffs in Michigan so housing prices go down there but nationwide housing prices do nothing could put go up and that for the most part has been true since the Great Depression housing prices have been going up maybe one or one percent or so per year actually a little bit less and in real terms but something fundamentally amazing happened in the beginning part of this decade I have right here this is the Case Shiller index and this is probably the best estimate of housing prices I can find this is better than the median because the Case Shiller actually tries to compare the price you'd pay for the same house and maybe we'll do another video later on how they exactly do that but if we look at the Case Shiller index let's see in 2000 that's where they index it to it a house that costs you know a hundred thousand dollars in two thousand or the index was at one hundred and two thousand by two thousand for the int that houses nationwide this is in the national index right here nationwide prices had increased by forty six percent and by 2006 where they peaked they had increased by 88% they had almost doubled since the price in 2000 and so the obvious question is is why did this happen what what drove prices to increase so fast when really for most of the history of America housing prices have never increased this fast especially considering what was happening in the broader economy and what do I mean by that well what what it for the price of anything did increase what has to happen well the the demand has to increase faster than the supply right so let's let's look at possible theories what what our demand drivers that could make housing prices go higher let me write that in green demand drivers well maybe maybe the population maybe population grew faster than the housing stock when I say the housing stock I just mean that well we're saying just demand so let me just say population the housing stock is supply so population goes up that's a demand driver what's another demand driver incomes incomes go up right that's another reason maybe if a lot of people just become a lot richer they're willing to pay for houses and water supply what are the supply drivers well these are just new homes built new homes built so if you buy the the classical supply demand argument why housing prices increased by 40 percent from 2000 to 2004 or why they increased four by eighty percent from 2000 to 2006 these dynamics should have grown faster than these dynamics so the population or maybe the total income if you take the population and the incomes grew faster than the new homes built so let's let's see if that's true so I found this this New York Times article and you could do some Google searches and I'm sure you can find probably better data this is just me doing it very fast search on this stuff let me see if I can get it up okay here it is so this is from a New York Times article this is a little graph and this is showing this is the average of incomes reported on all tax returns so notice from 2000 to 2004 the average reported actually went down it actually went down from 2000 to 2004 and this is interesting let me see if I can bring this in here so here they say total total reported income in two thousand four dollars so they adjusted for inflation fell 1.4% but because the population grew during that period average real incomes declined more than twice as much falling by 1641 a year or three percent so what are they saying they're saying the total the total income fell by 1.4 percent but the population must have grown by about one and a half percent and so the average per-capita was 3% so let me let me write that in summary so what do we know what happened we know from 2000 to 2004 and this is nationwide 2000 to 2004 we know that the population increased by roughly one point by roughly 1.5 percent so not by much I mean this is over a four year period so per year it's it's it was growing by less than a percent and then if you go to the income income per person income or actually this is probably well this is income per for tax filing but that's a pretty good proxy income for tax filing that declined by three percent so the total money available the total money available that New York Times article just showed us actually declined by what did they say by 1.4 percent so the argument that somehow there's more money out there chasing you know the same number of homes or slightly larger number of homes doesn't really doesn't really carry carry much weight but just let's just make sure maybe for some reasons maybe houses were destroyed or the number of homes built just didn't keep pace with this population increase so let's see what what data we can find on that well let's see I found this this thing this says that this was in 1999 they say the composition of estimated 115 million housing units the United States so we can say roughly that in 2000 that there were 115 million housing units so in 2000 there were 115 million housing units so let's see over this time period how many roughly how many housing units were built what percentage did the housing stock increased by and I found this data here and this is annualized new home builds by year and I'm not going to go through all of the math but if you see let's see if I go back to 2000 I know this might be hard for you to see some but if we pick up pretty much any any month you know from 2000 2001 this isn't thousands so on an annualized basis maybe 1.5 million homes that's was two thousand but it started accelerating all the way to 2004 by 2004 we were building roughly two million homes a year so over that time period we can say on average you know you can work the numbers for you know to get an exact number but it should work out we were building about 1.8 million homes a year 1.8 million new homes per year new homes per year and we can assume that that the you know how homes destroyed were pretty negligible I I'm not aware of most neighborhoods where they were you know bulldozing homes if anything they were just renovating homes but these are brand-new homes so over that four year period I'm just going to focus there because that's where we got data from that New York Times article how many homes were built well 1.8 times four that's what that's a 1.8 times four so roughly 7.2 million homes new homes were built over that time period and we started with the base of 115 million roughly in 2000 divided by so over that time period the housing stock increased by 6% so the supply of homes went up by 6% so what's going on here from 2000 to 2004 we built a ton of houses the supply of homes went up by 6% people's incomes actually went down because we were in a recession people were getting laid off or they were just willing to work for less income went down and the population barely increased and if we look at the total dollars that were being earned that actually went down so the the actual money out there to pay for houses went down and at the same time the total number of houses went up but at the same time in over this exact same period the prices of houses went up by 46% or I forgot the number but it was 40-something percent and actually continued to race up until 2000 where 2006 where it went up eighty percent relative to 2000 so this is is is is bizarre this is you know it's basic economics would tell us that if the supply is increasing if the supply is increasing and the demand is decreasing prices if anything should come down so what happened so I'm going to let you think about that a little bit that you know there you have the supply demand thing that would tell you the prices went down but not only did they not go down but they raced up faster than they've ever done in in history in the history of the United States so in the next video I'm going to tell you frankly why I'm pretty sure housing prices did go up see you soon