Is There a Housing Bubble?

Dean Baker and David Rosnick

September 12, 2005

Over the post-war period, house sale prices have generally kept pace with the overall rate of inflation until the last eight years. Also rental prices and home sale prices have moved at roughly the same pace. This is reasonable, since people can switch between renting and owning if there is a big difference in the cost. Also landlords can sell rental property as ownership units, if rents are low and house sale prices are high.

The chart below shows inflation adjusted home sale prices and rental prices over the post-war period.

The rental index is the Bureau of Labor Statistics (BLS) rent index from 1953 to 1982 and its owners equivalent rent (OER) index from 82 to 2005. (The OER is somewhat cleaner because it strips out the impact of utility price changes -- these are not supposed to be included in the rent proper index either, but it is difficult for BLS to strip out utility costs completely. The OER index began in 1982, prior to 1982, the rental index is the rent proper index.) The home price measure is the BLS ownership component of the CPI prior to 1982 (when the series was discontinued) and the Office of Federal Housing Enterprise Oversight House Price Index from 1982 to 2005. The movement in the two indexes is averaged for the 7 years where they overlap (1975-82). Both the ownership and rental indexes are deflated by the CPI-URS and CPI-UX1, the standard deflators.

Dean Baker is a Co-Director and David Rosnick is a Research Associate at the Center for Economic and Policy Research.