How to Invest in Housing

Home sales are improving, but they have a long way to go before they return to normal.

The recession that started five years ago was caused by a gigantic bubble in real estate prices. According to the S&P/Case-Shiller Home Price index, the value of U.S. homes prior to that had been remarkably stable for a century. Starting at a benchmark of 100 in 1890, inflation-adjusted prices fluctuated modestly, bouncing between about 65 as a low and 125 as a high. In 2000, the index was at 110. In other words, over a period of 110 years, the value of the average U.S. home had risen just 10% more than the rate of inflation.

Then something utterly unprecedented happened. The value of homes started rocketing into the stratosphere. The index burst past 125 in just two years and then past 200 by 2007. In seven years, home prices roughly doubled. The rocket reached its apogee and headed down on the same trajectory it went up; the index is now at about 140.

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James K. Glassman
Contributing Columnist, Kiplinger's Personal Finance
James K. Glassman is a visiting fellow at the American Enterprise Institute. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence.