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With the graph above, Shiller and his former student, Harvard professor John Campbell '84PhD, created one of the signature pieces of economic research of the past generation. Wall Street had long used the ratio of a company’s stock price to its earnings to judge whether the stock is fairly valued. But Shiller and Campbell used average earnings over ten years instead of current earnings. The resulting graph foretells stock market peaks and plunges with uncanny accuracy.
In 1991, Shiller and two other economists created the Case-Shiller index, which tracks housing prices in real time. Early this decade, as the real estate market boomed, Shiller looked for historical data on house prices and found that this basic information didn’t exist going back more than a few decades. So he compiled the data himself, from historical sources.
Over the long term, house price increases follow household income increases more closely than other factors. The graph above shows the historical data on the housing market and household income since 1970. The graph below shows this relationship even more clearly. When you divide median home price by median household income, the result is a ratio that remained fairly steady from 1970 to 2000. Then—with the boom in the housing market—it took off.
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©1992–2012, Yale Alumni Publications, Inc. All rights reserved. Yale Alumni Magazine, P.O. Box 1905, New Haven, CT 06509-1905, USA. yam@yale.edu |
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