Like the old real estate adage, "location, location, location," we have only one question these days. We just ask it different ways.

"Are we in a housing bubble?"

"Will home values decline?"

"Did I pay too much?"

The attention is no surprise: Housing is our most widely owned asset. We're all stakeholders in this. Another reason is the incredible stories coming out of places like San Diego, Northern California, West Florida, and Miami. Last week a Florida reader wrote to tell me about the options he had on Florida condos and how he wouldn't go near anything as dangerous as the stock market again because he had been so badly burned in the Internet bubble.

What that tells me, even if it escapes him, is that his habits of investing haven't changed, but the venue has. To me, California, Florida, and much of New England look like a replay of Texas in the '80s. Back then we had savings and loans financing "see-through" buildings, condos and houses being sold with buy-down mortgages, and a long oil-bust recession.

By the time it was over the spine of Texas, Interstate 35, was littered with manufactured home repos from Dallas to San Antonio. Virtually every financial institution in the state was busted. Dallas, Houston, and Austin condo prices plummeted: There is no market when you ask people to pay cash because there are no lenders.

So here's a question: If the stories and magazine covers aren't enough, is there any broad statistical evidence of excess?

Yes. One indicator, cited in a recent issue of Grant's Interest Rate Observer, is the dollar volume of home sales divided by gross domestic product. The figure for 2004 was a near record, nearly 3 standard deviations greater than the average of the last 35 years.

Others can be found in a regular report from the Federal Reserve, the "Balance Sheet of Households and Non Profit Institutions," one of the many sections of the quarterly Flow of Funds.

If you examine these figures you learn that our collective net worth declined from 1999 (no surprise there) and bottomed in 2002. You also learn that we had fully recovered by 2003 and that we've gained $9.4 trillion in net worth--- nearly 25 percent--- from the 2002 bottom.

The largest source of gain? Home values, up $4 trillion. (This compares to a $1.3 trillion gain in the value of corporate equities and a $1.3 trillion gain in the value of mutual funds.)

As I said, we're all stakeholders in this.

But let's go back further.

Examining the same data back to 1952 I found that:

  • Residential homes are the highest percentage of our collective net worth they have ever been, 36.3 percent.
  • We have been borrowing at a prodigious rate, with mortgages equal to 43.7 percent of home value. That's only a bit less than the record 44.2 percent set in 2004.
  • We reached a record for the value of homes compared to the value of our financial assets, 48.5 percent.

Compared to the median values of the last 50 years, these are big shifts. Viewed statistically,values are at extremes. The median value of houses as a percent of net worth was 26.8 percent. That's 2.6 standard deviations from the current 36.3 percent value.

What does that mean in English?

Try this. You can be a member of Mensa, the high I.Q. society, if your intelligence quotient is at least two standard deviations higher than the median, or normal, I.Q. That's an unusual score because it puts you in the top 2 percent of the population. (To find a community of peers you'd have to live on campus at Cal Tech.)

And that's where current home values are relative to everything else--- about two standard deviations up from the medians of the last half-century.

The bottom line: Collectively, we're heavily mortgaged in a period of extreme prices. The return to more normal prices could be as painful at the Great Texas Real Estate Crash.

On the Web:

Historical Balance Sheet, 1952-2005

Recent Flow of Funds Releases

Other columns on housing:

Sunday, July 18, 2005: Living in the Dream Economy

Sunday, May 8, 2005: Home is a savings shelter

Sunday, April 31, 2005: Fat-cat housing dilemma

Reference table:


Housing in the Consumer Balance Sheet, 1952-2005

This table uses three common measures of the consumer balance sheet to illustrate the current extreme level of residential real estate values.
Measure 2005Q1 Avg.

Houses as % Net Worth



Houses as % Financial Assets



Mortgages as % Houses