The WSJ told readers today that house prices rise in step with incomes. Is Rupert Murdoch trying to drive readers crazy in the middle of the worst housing crash since the Great Depression. Write this 1000 times: "house prices rise with inflation, not family income." The point is simple. If my income goes up by 50 percent, I might be expected to buy a home that is 50 percent more expensive, I don't expect to pay 50 percent more for the same home. As a theoretical matter, if house prices rise in step with income, you would get all sorts of strange implications, like non-housing wealth would continually fall as the country consumed ever more based on its housing wealth. You would also find an ever larger gap between house sale prices and rents, since rents have generally followed the overall rate of inflation. We can also look back over 45 years of government data and see that house prices rose at the same pace as overall inflation from the early 50s until the bubble took off in the mid-90s. We also have data compiled by Robert Shiller that shows that house prices just tracked the overall inflation rate for the hundred years from 1895 to 1995. So, the WSJ should stop repeating nonsense (someone might actually believe it). Say it again, "house prices rise with inflation, not family income."
--Dean Baker
