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NPR: Good News, House Prices are Plunging
NPR told us that there was good news in the increase in existing home sales reported last month. Sales did in fact rise, although it is reasonable to wonder about the extent to which weather was responsible. Sales in the Northeast rose by 11.3 percent. Since the weather for the months in which contracts were signed (December and January) was unusually good, this could explain much or all of the reported upturn.
However, the bigger part of the story is the sharp price decline reported in the data. This price decline was somewhat obscured by the surge in sales in the Northeast, which has prices that are much higher than the national average.
By region, over the last three months, median house prices have been dropping at annual rates of13.5 percent in the South, 21.4 percent in the West, and 25.6 percent in the Midwest. They rose at a 6.3 percent annual rate in the Northeast.
The sharp rates of price decline are probably good news in the sense that they are part of a necessary price adjustment, but it's not clear that this is the reason the media gave them so little attention. Even now, few news accounts seem to acknowledge that the economy had a housing bubble which must deflate.
--Dean Baker
COMMENTS (6)
Weather had nothing to do with it. This is part of the normal seasonal pattern, and the NAR release was downright deceptive.
Seasonal:
http://njrereport.com/images/feb08_yoy.gif
Year over year:
http://njrereport.com/images/feb08_mon.gif
Posted by: DB | March 25, 2008 8:20 AM
I’m a little confused about the S&P/Case-Shiller Home Price Indices. Does anyone know whether or not these indices are in nominal or constant (inflation adjusted) dollars? I assume that they are nominal dollar indices, but the charts and analyses of these monthly price series provided by the media don’t seem to make this clear.
Also, I’ve been thinking about a NYT article written by George Mason University’s Alex Tabarrock last week, and I am just sort of dumbfounded by this economist’s statements regarding the prospects for future home prices. To me, the most remarkable statement that Dr. Tabarrock makes in this article is the following “If house prices are heading back to the levels seen in 1997, then we are facing catastrophe.” Further on in the article, Dr. Tabarrock indicates that “Several studies estimate that the average house prices of 2004 were close to fundamental levels, so we may see prices stabilize near that level.”
First off, for many Americans, the rise in housing prices to current levels has been a true catastrophe, as incomes certainly have not kept pace with the rise in housing prices over the past decade. While I can see that the rapid run-up in housing prices has probably been great for the majority of American households, I feel that it has left a large chunk of U.S. families and individuals in the dust. Unfortunately, I see very little discussion or coverage of the plight of non-homeowners in the coverage of the ‘housing crisis’ provided by the media.
Secondly, Dr. Tabarrock doesn’t seem to spell out very well why he thinks that a drop in housing prices back to their long-term trend level would be a catastrophe. And thirdly, it seems interesting that a drop in housing prices back to 2004 levels reflects current fundamentals. I guess that I would need to read those “several studies” that apparently provide the analyses for this assertion. Based on what I believe is a constant dollar chart provided with his article, a drop in housing prices back to the 2004 level would mean a drop back to an index of about 170 (1949=100.0), from a peak of about 185 in 2005. This estimated 2004 level is actually higher than the projected level of 165 for 2008 shown in this chart.
Posted by: fabian59 | March 25, 2008 2:10 PM
Fabian -- the indices are nominal, Tabarrock is "real." So as the Fed throws the dollar under the bus, Tabarrock's chart plunges while S&P/Case-Shiller show steady or slowly declining prices.
As for catastrophe -- the debt deflation as prices drop is the scary part: as people go underwater on their mortgages and walk, banks are left with bad loans. Enough bad loans and the bank collapses, enough banks collapse and the system collapses. As a renter, I WANT price declines; I agree with you, the media is disgustingly one-sided. But it's in our interest as a nation for the declines to be slow enough for banks to rebalance their assets.....which is decreasingly likely. Things will probably get a lot worse, first.
Posted by: DB | March 25, 2008 2:40 PM
IIRC, Case-Shiller is not inflation adjusted, and a quick Google seems to support that view.
House price declines are good news for people who wish to buy a house. They're bad news for just about everyone else, especially banks.
For a good look at fundamentals of housing prices, you don't need to look at any especially in-depth studies - unlike many products, houses have an easily computed intrinsic value - the value at which they rent.
By that measure, housing prices in the SF Bay area still need to fall by almost 50%. Many other bubble-inflicted localities have a similarly large fall ahead of them.
The damage isn't going to come from the *fall* in prices - the damage is actually coming from the *rise* in prices - it's just that we won't recognize that damage fully until they fall.
It's kind of like getting shot out of a catapult - the fall from the height will kill you, but the cause of death is the catapult, not the fall.
Posted by: Jim D | March 25, 2008 2:42 PM
Good analogy, Jim D. I'll have to use that one.
Posted by: Mr Duncan | March 26, 2008 6:40 AM
DB & Jim D. Thanks for your follow-up on the S&P/Case-Shiller Home Price index. I had suspected that these indices were in nominal dollars, but I really couldn’t seem to verify this even by looking at the information about this index provided at the S&P">http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html">S&P web sitee.
Actually, when you click on the “Enlarge This Image” hypertext for Dr. Tabarrok’s article two charts are displayed. While neither chart is labeled to let you know whether or not the price indices are nominal or constant dollar price series, it seems fairly obvious that the top graph (Case-Shiller) is in nominal dollars, and the second chart (from Dr. Shiller’s Irrational Exuberance) is in constant dollars. This sort of stuff drives me nuts, but I’m sure that it was just an innocent oversight by Dr. Tabarrok. Similar to the way that I misspelled his name in my first posting.
Posted by: fabian59 | March 26, 2008 8:29 AM