I didn’t post the following picture of trends in housing prices in the United States, 1890 to the present, when I posted in reaction to Alex Tabarrok but I will now.
Click on the graph for a larger image. The picture was shamelessly stolen by Alex from the New York Times.
I’ve been mulling over the reasons for the larger trends reflected in the graph. Why was there a protracted valley from the late Nineteen Teens through 1940? Why did the valley end and (more or less) resume its prior level? Why the enormous spike starting in the late 1990’s and continuing to the present?
I have an idea that I’m trying on for size. Is it possible that housing prices are a lagging indicator of certain government policies, particularly immigration policy and tax policy?
While the the explanation for the drop in prices in the late Teens captioned on the graph itself is compelling, I’m not sure it tells the whole story. There were several other developments in that period which may also have contributed. First, immigration policy was tightened and the high rate that had characterized the 1890’s and early part of the 20th century slowed. And the individual income tax was enacted.
During WWI the top income tax rate rose to 77% but after the war this was lowered to 25%. During the 1930’s and WWII this was progressively raised to 94%. My point in mentioning the income tax is to look at the resurgence of prices in the 1940’s. In 1943 the income tax, paid by rich people but mostly ignored by average Americans, was transformed into a tax on most Americans as a means of funding the war by the mechanism of the withholding tax. But interest had been deductible since the very beginning of the income tax and, consequently, borrowing money at interest to purchase a home became a sensible method of shielding income from taxation.
So, why the spike in housing prices over the last several years? To the explanations I offered in my post cited above add the point suggested by fester, the lowest interest rates in a generation, immigration, and tax policy.
