note: above chart is from The Chicago Mercantile Exchange and appears above under 'fair use'
From the above chart, I would like to discover whether we are in a real estate bubble. I begin by calculating the monthly payment on the entire value of the median home for 1981 and 2005.
Home value Interest Rate Monthly Payment1 Inflation Adjustment ('81$)2 Hrly Wages3 Hrs per Mo
1981 $50,000 13.75% $582.56 $582.56 $7.50 77.7
2005 $200,000 6.00% $1199.10 $1303.53 $18.00 66.6
Next, I find an inflation calculator at westegg and conclude that the monthly cost didn't exceed the expected rise that would track inflation. I confirmed this by retrieving hourly wage data and finding that the numbers of wage hours it took to buy the median priced home dropped during this time. I would also observe that the 'median' home has crept up in size, therefore, not only is it 14% 'cheaper' to buy a home, but that home has also increased in size. I was unable to find data for 1981, but in 1970 the median new home was 1400 sq ft. In 2004 it was 2330 sq ft. A 1.5% per year increase.
From this, I conclude the the inflation adjusted cost has trended down a bit, less than .3% per year on average. The bubble may very well exist, but it's likely localized both regionally (e.g. parts of California, Boston, etc) or at the very high end (i.e. homes selling for $1M+ as the result of localized bidding wars, not true supply/demand, but isolated shocks to the system.) This was exacerbated by the use of ARMs and irresponsible financing.

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1 - based on a fixed 30 yr mortgage
2 - If we adjust the 1981 cost of a home to 2005 dollars, we get $111,879. I claim the remaining appreciation was interest rate related.
3 - Data Source - US Census Bureau Note: These wages are the second lowest fifth, lower than 'median' income for households.