The Price of Falling House Prices
In case you missed The Wall Street Journal this morning.
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“The Future of Home Prices” concludes that the very local bank that was 70 million homeowners’ homes won’t be in the business of dispensing free-and-easy cash for years to come.
Case-Shiller by Market (WSJ)
Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.
The tenor of the story echoes the comments of the other side of the Case-Shiller equation picked up by Calculated Risk and posted by The Big Picture, Yale economist Robert Shiller. Dr. Shiller dons a somewhat unfamiliar hat of “behavioral economist” in his assessment of a factor that led to such widespread dislocation in the economy: Groupthink. At any rate, he asserts the crisis has legs, and that it’ll be with us for “years and years.”
Our problem–accelerated by groupthink–appears to have been not recognizing that we should have constrained our financial risk to equities investment rather than to look at home purchases as a sugar daddy for all our extravagant desires, including the next move-up house.
Still, we think most analysts are running the same predictive models that got us into this mess to track where we are and where we’re headed next. The patterns won’t hold. Household income to home price ratios, nor cost-to-rent vs. home price ratios, nor home price trending ratios will either give us a view of a critical indicator–the magnitude and duration of the overshoot–or a look at what “normalized” prices will be once demand returns as a factor.
Demand is academic right now. Only those who have to buy are buying, and the decimation of earnings and the job market is whacking the heck out of that shrinking bunch.
Gets you to thinking crazy thoughts about what the solution might be; like this one from Ira Artman.
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The Price of Falling House Prices has yet to be identified or understood. For a decade the consumer looked at the house as a reservoir of money to use against non appreciating assets, such as cars. Now that the home equity has vanished, the car industry along with other retail markets that benefited from the housing inflation find themselves near bankruptcy. The easy supply of money from the equity line in people homes fuel higher salaries, higher priced cars, and “super size menu” mentality. Wealth was everywhere, money was fast and easy. Now, a generation of people who only know how to spend and not save will be reconditioned to what the baby boomers know, you must have a rainy day fund. This crises will save the American family by returning to the principles of “more saving and less spending”. So, the effect of the falling house price will reach far, but will result in the next generation,the Gen X, being a more financial discipline society.
Ursel Mayo
Here’s a thought that I have yet to hear expressed. It seems to me that, given that in many regions home prices have fallen to below their replacement cost, builders will no longer be able to compete in these housing markets. In turn, as inventory is absorbed, a housing shortage will emerge. When this occurs, either builders will reamin on the sidelines or prices will escalate once again.