Political  Calculations

Once upon a time, we developed a better method for detecting housing bubbles. Today, we're going back to the data mines to do some refinement and to see where things stand today.

Our first chart shows the relationship between median new house prices in the United States and median household income for the years from 1967 through 2010.

Here, we've revised our earlier look to better define the major trends evident in the data. Here, we see one major trend running from 1970 through 1986, then a second trend running from 1987 through 1999. After 1999, we see the housing bubble beginning its inflation phase as the relationship between median new house prices and median household income became decoupled, running through 2007. Since then, the U.S. housing bubble has been in its deflation phase, which appears to still be ongoing, as the relationship between the median prices of new houses and median household income remains decoupled.

Median New House Prices vs Median Household Income in the United States, 1967-2010

 

One important thing to note is the shift in the trend that occurred after 1986. We believe this shift was triggered by the Tax Reform Act of 1986, which eliminated a number of debt-related tax deductions, but which left the long-standing mortgage interest deduction in place, even increasing the amount of the deduction.

The changes brought about by the Tax Reform Act of 1986 had two main effects. First, it incentivized home ownership by enhancing the tax benefits associated with owning property and having a mortgage. Second, in eliminating the favorable treatment of other debt interest, it made the home mortgage the primary channel by which people would choose to accumulate debt thanks to the interest on that debt being tax advantaged.


Political Calculations

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