SAFE AS HOUSES?(The Talk of the Town)

In the past few months, it's been almost all bad news for the housing market. Homebuilders have had to tell Wall Street that between twenty and thirty per cent of their contracts have been cancelled. Janet Yellen, the head of the Federal Reserve Bank of San Francisco, has said that streets full of unsold new homes now make parts of Phoenix and Las Vegas look like "ghost towns." Selling a home takes longer than it used to, and the inventory of existing homes for sale has gone up almost forty per cent in the past year. Yet, through it all, one fact has continued to provide solace to anxious homeowners and real-estate brokers alike: housing prices have stayed remarkably stable.

The lesson we're supposed to take from this is that a home remains as solid and safe an investment as ever. After all, we're constantly told, you have to go back to the Great Depression to find a full year in which housing prices fell. Unfortunately, the numbers upon which these comforting conclusions depend--namely, median home prices for the country--are unreliable and misleading.

There are plenty of statistics available about the housing market, but median home prices, which are tracked by both the National Association of Realtors and the Census Bureau, are what typically make headlines. They seem to tell buyers and sellers exactly what they want to know: how much the one has to spend, how much the other stands to make. The N.A.R. says that median sale prices for existing homes have risen fifty-seven per cent since 2000, and in many markets the increase has been much bigger than that.

Although these numbers come from an association that has a vested interest in making the housing market look healthy, they do provide a roughly accurate picture of how housing prices have behaved in the past six years. But if you're trying to figure out what kind of investment housing is--what rewards you can expect and what risks you'll run--median prices become a lot less useful. In the first place, the data don't adjust for improvements in quality. People have been building bigger homes--the typical new home is about twenty-five per cent bigger than it was twenty years ago--and putting money into improvements like central air-conditioning, home theatres, and pools. And the impact of quality adjustments isn't trivial; a study of home prices between 1977 and 2003 found that adjusting for quality reduced the return to homeowners by forty per cent.

As for the much vaunted statistic about housing prices never falling for a full year since the Depression? That's true only if you forget about inflation. When you adjust for it, you find long stretches when housing prices tumbled and then stayed low for years; nationally, real home prices were actually eight per cent lower in 1991 than they were in 1979. What makes the ...