D.C. Housing Bubble - 110 Years of the Washington Post

Somebody once said there are only two groups of people in the world: The first group believes there's housing bubble, the second group wants to kill the first group. Being in the first group, I suspect the second group has a classic Karen Horney neurosis they would go mad to protect, but I'm getting way off mission here. If you want to know about the housing bubble in Washington D.C., the Washington Post would be a good place to start. I started with a sampling of the Real Estate ads from the Post of 110 years ago today, June 27, 1895.

FOR SALE - 2 BARGAINS, TO-MORROW - Look- 6-room brick, 2d and N sts, se., bay window; water, sewer and gas; $1700; $700 cash; cheap at $2,000; 5-room frame, N st, near 11th st. se.; rented at $9, for $950 cash. JOHN F. DONOHOE, 308 East Cap. st.

FOR SALE - $8,000 WILL BUY AN ELEGANT new brownstone and press brick bay-window house, 1342 U st, near 14th; lot 18x100 to paved alley; 9 rooms and bath; handsomely papered throughout; this is a great bargain. Apply on premises.

NEARLY NEW BRICK; 6 ROOMS; bath, concrete cellar, papered; lot 18x90; in good location; northwest; only $3,500; worth $4,500; owner must sell. BOOTH & BRUNER, 1003 G nw.

and, from a large agency ad:

REAL ESTATE BULLETIN BY
THOMAS E. WAGGAMAN, 917 F ST. NW TWO-STORY BRICK AND FRAME HOUSES FOR SALE

413 O st nw, b, h, 9 rms........................................$5,200
1343 and 1345 V. st nw, b, h, 6 rms....................$3,500
Stable, bet 20th and 21st and L and M sts nw..$2,500
Hurst Place, Conduit road, f, h, 6 rms.................$2,200
Frame Cottage, Brightwood, 9 rms.....................$6,500
422 and 422 1/2 11th st sw b, h, 6 rms each.....$3,000
2009-11-13 and 15 Gale st ne f, h, 6 rms..........$1,060
27 Dingman place nw, b, h, 5 rms.......................$750
13-15 and 17 Burk's alley sw, f, h, 4 rms............$900
109 and 111 N st se, b, h, 6 rms...........................$900

So the average price for a decent size house for the times (probably around 1500 sq ft, max) was around $3,000. You could get cheaper by living in a much smaller house or in a cheaper area, or you could pay more for 9 rooms and a bay window, but $3,000 looks around average. Now, according to Robert J. Shiller, as reported by the Post in April, housing prices in the U.S. have risen at an average of 0.4% above inflation since 1880, with most of that gain coming in the last few years. We're only going back to 1895, but let's look at our $3,000 investment with simple annually compounded interest over the last 110 years.

5% - $642,605
6% - $1,822,915
7% - $5,120,788
8% - $14,247,358
9% - $39,267,750
10% - $107,230,078

The long-term return expected through the stock market is usually kicked around at 10%, and that $107 million dollars looks a lot better than having owned, maintained and paid taxes on a house in D.C. for 110 years. Even the 5% simple interest isn't bad, and $642,645 is just a little more than 200 times our $3,000 investment. The interesting point here is that absolute inflation over the last 100 years is generally given as x20, ie, our dollar today buys about 1/20th of what it bought in 1900. Assuming there wasn't a huge run-up in DC real estate between 1890 and 1900, this would indicate that real estate does much better than the .4% above inflation. Even if compounded continually, 0.4% interest will barely ad 50% to a sum over 110 years, so we would expect our $3,000 house in D.C. to cost $90,000 today, which is obviously low.

According to a recent Economist article, housing prices in the US have actually gotten cheaper on an inflation adjusted basis since 1900, I'd estimate about 30% cheaper, according to their bar graph:-) You could argue the Economist numbers (at the top of our bubble) to suggest that housing is a bargain, but I would argue their numbers, and the basic interest calculation above, to suggest that housing is just a lousy investment.