Don't forget to account for inflation when discussing increases in value. A straight inflation adjustment of the avg. sales price in 2000 pegged to CPI would bring the price to a little more than $194,000 in 2009 Dollars. http://data.bls.gov/cgi-bin/cpicalc.pl

Anyone who thinks that the price of a home should only keep up with inflation is insane. Real estate would be one of the worst investment vehicles available if that there the case. So the real question should be how much inflation-adjusted home value has been gained or lost between now and then. In other words, how much of the ~$85,000 adjusted difference is real value gained versus leftover froth from market peak?

Hi, Pete -- I have mixed feelings about adjusting the cost of housing for inflation. On the one hand, it's a handy benchmark. On the other, the cost of housing is an important part of the cost of living ... otherwise known as inflation.

I think your question about real value is a great one, though. Anyone have thoughts on that?

I agree with Pete's point on using some measure (CPI inflation or perhaps COL index) of overall increasing house values is required. An ensemble of these will then lend to a reasonable range when one extrapolates out to today or future dates.

I am a stingy home buyer and believe
that house prices are still overpriced. It really does not even feel like much of a buyer;'s market in some areas (Howard county, I am looking at you). But even I know that statements like, "we need to get back to 1997 prices" seems excessive.

In the end, I would just be happy with some good old fashion moderation in all this.

Agreed, Jamie, but if I have to hear or read any more bellyaching about limiting offers to 1997 prices, I think I'm gonna hurl! Because the point you make is the absolutely correct. It's a cost of living issue. Home prices have gone up in the last 10 years, but so have incomes. Couple it with the significant amount of growth in the last 15 years... well you get the picture.

Jamie, the month of May was a good one around the Timonium area. I know a majority of the Long and Foster Timonium office did over $1m is sales and have been movin' and groovin' for the past couple of months.

My belief is that there was some pent up demand from last year that made it hot in the beginning of the year and has now started to cool off some in June. I was able to have a sold and settled volume of $2.5m in May - http://zacharyhosford.com/wp-content/uploads/2007/09/extraordinary-agent-tt.pdf !

Sadly enough I feel like the $8000 1st time home buyer tax credit has done little because not many buyers know about it and it is only targeting a portion of the buyers out there. Has anyone been able to monetize the credit in Maryland thus far?

Pete, I think you're framing the argument all wrong here. Have a look at these charts:

http://mysite.verizon.net/vodkajim/housingbubble/index.html

From 1975 to 1997, it would have been perfectly reasonable to assume that housing would track closely to inflation. In the past 10 years, this has not have been the case. That's why we're seeing a huge fall in prices. Here's another way to think of it. If the real (inflation adjusted) value of a home increased in perpetuity, eventually no one would be able to afford a home! A home built 100 years ago (and fairly maintained) would require an insane amount of money to buy if this were the case. I think the bursting of the bubble is proving that real estate is not an awesome investment.

"Anyone who thinks that the price of a home should only keep up with inflation is insane. Real estate would be one of the worst investment vehicles available if that there the case."

Many of the country's lead economists (like the ones who reported at the NAHB last year) all agree that when looking at the long-term trend - real estate mirrors inflation.

A home is a great investment for the average joe for exactly that reason. You are incorporating your cash into something that will retain its relative value throughout the year - not get you rich.

Thoughts that promote real estate as a money maker for the masses are pure speculation and marketing campaigns. The fact that everyone bought into the concept helped attribute the the bubble we experienced and subsequent correct we are seeing today.

Kevin and Anonymous nailed it. Thinking of a house as an investment that will consistently outpace inflation is full of risk. You could do well for a period, maybe years...even decades. However, if housing consistently outstrips inflation (and wage growth) it becomes impossible to afford. That is not sustainable and cannot hold true for an extended period. To me the bubble we all just experienced demonstrates this adequately. Per Pete, I guess I am insane.

Real estae tracks inflation over the long term: true

We are currently in a period of deflation: true

The bell curve of housing prices is on a fast downslope: true

When bubbles burst, there is often an overshoot on the downside: true

1997 prices coming: YEE HAH!!

These graphs are overly simplistic. They fail to account for reduced financing costs and larger houses. (Further, there are other factors to consider that determine people's net cash flow: some expenses have been decreasing, while others have been increasing. And building qualities have flucuated, too.)

I would like to see a chart--perhaps you are up to the task Jamie--that considers median cost using a fixed dollar (say 2009) of "financed square foot" averages. I suspect that we are close, if not lower, than the average when we account for financing and house sizes.

I just bought a house and paid far below 1997 prices in my neighborhood... And my financing is only 4.75 on a 30-year fixed to boot.

Hi, jake: I've never come across a data source for Baltimore-area square foot costs over the years. (But I just found one that definitely tracks other areas, and I'm waiting to hear if they perhaps have Baltimore too.)

Jake, I agree with you that when it comes down to it, affordability is the issue. Things like financing rates should be taken in to account as well. With that said, I still believe homes are overvalued. If affordability was what it was 10 years ago, we wouldn't be seeing the low sales and high inventory we're seeing now.

Overvalued or generally over-priced by 80% of delusional sellers (and a few buyers that are delusional). When I shopped for houses, I just decided that I would cut out the fluff.... and look for well-priced foreclosures in the higher end market...

So I guess that my perception of the market is based on looking at some of the better deals I've noticed in this market and pegging things to that. But when I drove by a house last week for sale that's priced higher than mine in a mediocre neighborhood iwht less size and amenities... I think it will never sell and take it out of the equation of housing prices. But if it does, then home prices will still fall!