{"id":13360,"date":"2010-11-18T09:00:08","date_gmt":"2010-11-18T17:00:08","guid":{"rendered":"http:\/\/seattlebubble.com\/blog\/?p=13360"},"modified":"2010-11-18T08:41:40","modified_gmt":"2010-11-18T16:41:40","slug":"is-1998-price-inflation-a-fair-home-valuation-method","status":"publish","type":"post","link":"https:\/\/seattlebubble.com\/blog\/2010\/11\/18\/is-1998-price-inflation-a-fair-home-valuation-method\/","title":{"rendered":"Is 1998 Price + Inflation a Fair Home Valuation Method?"},"content":{"rendered":"<p>Yesterday TheHulk brought up <a href=\"http:\/\/seattlebubble.com\/blog\/2010\/11\/17\/mid-week-open-thread-2010-11-17\/#comment-115661\" title=\"Comment by TheHulk\">an interesting idea<\/a> in the comments:<\/p>\n<blockquote><p>Whenever I look at listings online, for older houses (aka houses built before 2000), in my mind I make up a figure on what that house price should be today. My stupid back-of-the-envelope calculation is as follows:<\/p>\n<p>Current price \u2013 500K<br \/>\nLast Sold \u2013 250K in 1998<\/p>\n<p>Price today should be \u2013 250K * (1 + (Average Inflation from 1998 to Current year)* (Current year \u2013 1998) )<\/p><\/blockquote>\n<p>David Losh <a href=\"http:\/\/seattlebubble.com\/blog\/2010\/11\/17\/mid-week-open-thread-2010-11-17\/#comment-115671\" title=\"Comment by David Losh\">agreed<\/a>:<\/p>\n<blockquote><p>That has been my thinking from the beginning, go back to 1998 and add in inflation.<br \/>\n&#8230;<br \/>\nI do use 1998 as the golden rule of value.<\/p><\/blockquote>\n<p>It&#8217;s an attractive idea because it is so simple, and so logical.  It is also a perfect excuse for me to generate a pretty graph.  So, here it is:<\/p>\n<div style=\"margin: 5px auto; width: 600px; font-size: 0.8em; text-align: center;\"><a href=\"http:\/\/seattlebubble.com\/blog\/wp-content\/uploads\/2010\/11\/CPI-CSHPI-1998_2010-10.png\" title=\"Seattle Case-Shiller HPI &#038; Inflation\" rel=\"lightbox[13360]\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/seattlebubble.com\/blog\/wp-content\/uploads\/2010\/11\/CPI-CSHPI-1998_2010-10-600x435.png\" style=\"border: 0;\" title=\"Seattle Case-Shiller HPI &#038; Inflation - Click to enlarge\" alt=\"Seattle Case-Shiller HPI &#038; Inflation\" width=\"600\" height=\"435\" \/><\/a><\/div>\n<p>Inflation here in the Seattle area (<a href=\"http:\/\/www.bls.gov\/CPI\/\" title=\"Bureau of Labor Statistics: CPI\">according to the Bureau of Labor Statistics<\/a>) has averaged 1.81% per year.  If you assume that home prices were fair in 1998 and any increase since then above inflation is excess, then home prices around today are still roughly 33% overpriced.  Yikes!<\/p>\n<p>Of course, if you really want to match the inflation line up with the Case-Shiller home price trend line through most of the &#8217;90s, 1995 is a better choice to index to:<\/p>\n<div style=\"margin: 5px auto; width: 600px; font-size: 0.8em; text-align: center;\"><a href=\"http:\/\/seattlebubble.com\/blog\/wp-content\/uploads\/2010\/11\/CPI-CSHPI-1995_2010-10.png\" title=\"Seattle Case-Shiller HPI &#038; Inflation\" rel=\"lightbox[13360]\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/seattlebubble.com\/blog\/wp-content\/uploads\/2010\/11\/CPI-CSHPI-1995_2010-10-600x435.png\" style=\"border: 0;\" title=\"Seattle Case-Shiller HPI &#038; Inflation - Click to enlarge\" alt=\"Seattle Case-Shiller HPI &#038; Inflation\" width=\"600\" height=\"435\" \/><\/a><\/div>\n<p>If 1995 was a fair price and anything above inflation is set to be given back, home prices are still nearly 40% overvalued.<\/p>\n<p>Personally, I don&#8217;t think the simple inflation calculation tells the whole story.  As <a href=\"http:\/\/seattlebubble.com\/blog\/2010\/09\/23\/big-picture-week-price-to-income-ratio\/\" title=\"Big Picture Week: Price to Income Ratio\">I explained during Big Picture Week<\/a> back in September, I think most of the strong home price gains in Seattle from 1997 through 2000 were supported by a strong increase in our per capita income&mdash;a fundamental shift in the local economy that justifiably pushed prices up a notch.<\/p>\n<p>Personally I think it&#8217;s difficult to make a strong case for the home price bubble beginning much earlier than 2001 here in Seattle.  Unless all those high-dollar tech salaries disappear, I don&#8217;t think we&#8217;re very likely to see local home prices drop below the level of 2001 prices + inflation.<\/p>\n<p>When you re-index the charts above to January 2001, home prices today are only about 14% higher than inflation would suggest they should be, which seems a lot more likely to me, when you look at home prices compared to the whole host of underlying economic fundamentals including inflation, incomes, rent, employment, etc.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Yesterday TheHulk brought up an interesting idea in the comments: Whenever I look at listings online, for older houses (aka houses built before 2000), in my mind I make up a figure on what that house price should be today. My stupid back-of-the-envelope calculation is as follows: Current price \u2013 500K Last Sold \u2013 250K&#8230;<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[8],"tags":[86,61,177],"coauthors":[],"class_list":["post-13360","post","type-post","status-publish","format-standard","hentry","category-stats","tag-case-shiller","tag-fundamentals","tag-inflation"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.2 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Is 1998 Price + Inflation a Fair Home Valuation Method? \u2022 Seattle Bubble<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/seattlebubble.com\/blog\/2010\/11\/18\/is-1998-price-inflation-a-fair-home-valuation-method\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Is 1998 Price + Inflation a Fair Home Valuation Method? \u2022 Seattle Bubble\" \/>\n<meta name=\"twitter:description\" content=\"Yesterday TheHulk brought up an interesting idea in the comments: Whenever I look at listings online, for older houses (aka houses built before 2000), in my mind I make up a figure on what that house price should be today. 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