This graph shows housing equity in the United States. The way it’s shown here, housing equity appears to have undergone an extremely unhealthy evolution: rapidly accelerating run-up, sudden and brutal crash, and another rapid run-up. There’s no doubt the housing crash has been significant; after all, housing equity was cut by half. But the alarming run-up shown in this graph is to some degree an optical illusion. Indeed, an increase in the 1950s isn’t equivalent to a same-sized increase in the 2000s because the level of the series was dramatically different. For a clearer picture, we’ll use the natural logarithm of the series.
Now, the run-up around 2000 looks like a normal part of a trend that’s continued for more than half a century. The illusion shown in the top graph can occur whenever a series grows over time. Think of the principal on a savings account that accumulates interest. Soon enough, the effect of compounding interest kicks in and the principal appears to explode, even though it’s still growing at the same interest rate.
How these graphs were created: For the first graph, search for the series name. For the second, expand the “Create your own data transformation” option in the graph tab and choose the “Natural Log” transformation.
Suggested by Christian Zimmermann
View on FRED, series used in this post: