The S&P/Case-Shiller national home-price index for the fourth quarter fell 8.9% from a year earlier, the largest drop in its 20 years of data. And the Office of Federal Housing Enterprise Oversight's index -- which tracks only homes purchased with mortgages guaranteed by home-loan giants Fannie Mae or Freddie Mac -- was down 0.3%, the first year-to-year decline in the measure's 16 years.
In case you missed it, let's review what we just read. The Case Shiller index had its largest drop in 20 years. And the OFHEO had its first ever year over year decline in 16 years. Those numbers should stick out like sore thumbs because they are. Here's a graph from the same article which shows the severity of the declines:
Prices aren't just correcting -- they're plummeting hard right now.
Let's take a closer look at the Case Shiller Index:
Notice the following:
-- Prices barely increased for the first half of the 1990s expansion. They did increase by 25% over the last three years of the expansion.
-- Prices continued to increase during the slow growth of the early 2000s.
-- Prices exploded higher from 2003 onward.
Notice the difference between the two expansions. The 1990s and 2000s both saw economic growth. Yet home prices really accelerated in the 2000s for a variety of reasons.
Let's ask an important demand side question: was there a big difference from a demographic perspective between the 1990s and 2000? Did the US population explode higher? Did the US accept a whole lot more immigrants? The answer to both is no.
What the chart shows is prices rose far above their historical norm. That means we have a long way to go before prices correct to their historical norm. And it's important to remember a basic economic fact at this point: prices have a strong tendency to revert to their mean/median historical price.
Here is a chart of total inventory of existing homes available for sale (thanks to Calculated Risk)
The total number of existing homes available for sale has nearly doubled since 2001. There is simply no way that US demand for housing also doubled in the last 8 years. As a result, we have a ton of inventory to work off.
And the number of months of inventory as a percentage of the current sales rate is still incredibly high:
But the final problem is who's going to buy it? Even if there was a commensurate increase in demand, the US consumer is already in debt up to his eyeballs:
Let's review the basic points above:
1.) House prices are historically out of whack in a big way. They are far too high and need to come down.
2.) There is a boatload of inventory on the market.
3.) The sales pace is slowing.
4.) The US consumer is already in debt up to his eyeballs, indicating his ability to take out more mortgage debt is severely compromised.
Put in econ terms we have
Increasing supply and
Decreasing demand
which equals
Lower prices.
2 comments:
Is it that housing prices are too high, or disposable income too low.
Housing prices relative to health care costs, energy, tuitions, insurance do not look high. Whats wrong here?.
Inflation.
From 1990-2000, BLS CPI increased 32.5%, yet shadow stats SGS says it was 65%. Split the difference and housing prices adjusted for inflation deflated 25% for the first time records had been kept.
From 2000 to 2008, housing prices are up 70% having come down from their high. BLS CPI which was even more unreliable in this period says inflation was 25.6% in this period, while shadowstats SGS says it was up 106%. Split the difference and we have housing price increases at about 10% higher than inflation. Compensates for the deflationary period in the 90's. Conclusion no housing bubble (there were of course some localized bubbles in California, Florida, Georgia, no question which makes you wonder how many of the sub-primes were given to illegal immigrants).
The issue really has been income deflation among those who buy homes with mortgages. Income barely kept pace with the BLS CPI, which means it deflated if adjusted for real inflation. This is why the debt/income ratios have inflated.
Those with deflating real incomes were ineligible for prime loans, so we had a deflationary period for housing prices in the 90's, as demand was low. To get housing prices out of their recession, incomes had to increase (not possible since the Feds mission is to fight wage inflation), or loans had to be made to those who could not afford them. Enter the repeal of the Glass-Steagall Act in 1999, and the stage was set to pump sub-primes into the housing market and restore life.
Paul Volcker, Zbig Brzezinski, and all the other Trilaterals told us in the 70's they were going to lower our standard of living, the consumer was not informed and would not have liked the idea, but cheap credit gave them the illusion things were not so bad, and so rather than living it up beyond their means, they were simply trying to maintain the same standard of living they had been accustomed to.
But the party is over, the reality check brings us to an economy that is not productive. It creates nothing much of value except fictitous capital that gets traded to create bubbles that prop up GDP.
GDP if not for the hedonic manipulations, financial component, and the inadequate adjustments for inflation, has been negative for most of the 21st century. Except for a couple of quarters we have never really gotten out of the 2001 recession following the dot.com crash. And this despite out of control government spending, low interest rates, and tax cuts, all of which have been tools to stimulate the economy in the past (there are no more bullets).
The jobs being created for the most part involves serving fries and handling bed pans. Not much hope that incomes for the bottom 80% will recover. It is going to get ugly for those in the 30-80% group, maybe even 30-90%.
House prices have gotten quite scary. I may actually be able to afford a condo in the SF Bay Area (where I live). :)
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