Robert Shiller has put together the first, long, true index of home prices. By true I mean that as much as possible it looks at repeated sales of the same or very similar houses over time. Conventional indices confuse changes in size and quality with changes in the price of housing per se.
What the index shows is that real house prices have remained stable over the past 100 years. The contrary impression is driven by inflation and as noted above, changes in what is being measured. Stability, however, is what we should expect. The United States remains a relatively unpopulated country. When house prices in current population centers increase, suburbs and smaller cities expand. People move to less populated areas and in so doing alleviate the press on house prices. In the long run, the supply of housing is very elastic.
The glaring exception to stability is the last 6 or 7 years when house prices have skyrocketed far beyond where they have ever been before. Can you hear the pop coming?
Graphic from the NYTimes (click to open in new window).