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were nearly constant (home prices simply increased with the rate of inflation

in the greater economy). But between 1995 and 2006, housing prices took off

like a rocket, nearly doubling in 10 years. Indeed, the rate of price increase

was even greater in most major cities on the East and West coasts.^9

Which pattern was the exception and which was the rule? Two economic

facts would suggest a norm of housing prices doing no better than keeping

pace with inflation. First, looking back as far as 1950 shows a similar stable pric-

ing pattern. (Indeed, real housing prices in 1900 were at similar levels to those

in 1950, with a lengthy period of depressed housing prices during the Great

Depression.) Second, the cost of renting homes shows a similar pattern of ris-

ing in line with the rate of inflation—a relatively stable pattern that has con-

tinued over the last decade. Therefore, the exploding cost of owning a house

in the last 15 years is out of line with the historic pattern of rents and with pre-

vious housing price trends. High housing prices were not based on economic

fundamentals but by buyers and sellers who believed prices could not fall—

until they did.

FIGURE 4.6

Thirty-Six years of

Housing Prices

250.0

200.0

150.0

100.0

50.0

0.0

1975 1980 1985 1990 1995 2000 2005 2010

(^9) This discussion is based on R. J. Shiller, The Subprime Solution: How Today’s Global Financial Crisis
Happened and What to Do about It(Princeton, NJ: Princeton University Press, 2008); and D.
Streitfeld, “Housing Fades as a Means to Build Wealth, Analysts Say,” The New York Times, August 22,
2010, p. A1.
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