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Wednesday, August 27, 2008

Wishful Thinking

Yesterday, after the latest data on housing prices were released, there were many analysts saying we might be nearing the bottom of the housing cycle. I have a guest post at The Big Picture on whether housing is anywhere near bottom.

The bottom line is:

Are we near the bottom? Is the end near? I wish I could answer yes, but I think we have a ways to go yet. Paul Krugman says:

When will it all end? The answer is, probably not until 2010 or later.

I'm hoping it won't be that long, but so far the crisis has unfolded in an almost eerily slow fashion - sort of like watching a train wreck in slow motion and being unable to do anything about it - and there's no reason to think that will change.

Update: Here's more on yesterday's price data from Dean Baker:

Two Items Missing in Coverage of the June Case-Shiller Data, Beat the Press: The coverage of the release of the June Case-Shiller housing prices indices overlooked two important items in the data. First, an examination of the tiered indices (these show separately the movement of house prices in each city for cheapest third of houses, the middle third, and upper third) indicates a sharp divergence within many markets. In several of the former bubble markets higher end home prices appear to be stabilizing, while prices for homes in the bottom tier continue to fall rapidly. ...

Ultimately, there must be some spillover in the sense that if the cheapest homes fall far enough, people looking to buy more high-end homes might instead opt for a cheaper one and then invest in major renovations. But the divergence that is showing up in the data at present is striking.

The other important point to note in connection with house prices is that inflation has picked up so that house prices would be falling rapidly in real terms, even if nominal house prices were flat. ... The bubble can be deflated either by a fall in nominal house prices or through inflation. There are important distributional implications for which route the collapse follows (borrowers will be helped by inflation, while lenders will be hurt), but either route can restore house prices to their long-term trend level.

Update: On Dean Baker's point about segmentation in the market and stabilization at the high end, a different perspective from Calculated Risk:

[P]rices are now falling for luxury homes too:

[E]ven luxury homes are now showing weakness. ... That "prestige homes" index found that in the second quarter this year, values on many such houses in San Diego dropped 2 percent from the first quarter and 7.8 percent from second quarter 2007. The average price among those homes has fallen to $2.02 million, from a peak of $2.19 million in the second quarter 2007.

No area is immune. The housing bust is now moving up the price chain.

Update: Free Exchange adds:

Bottom feeders, Free Exchange: In A guest post at Barry Ritholtz' Big Picture site, Mark Thoma gives it to us straight on the latest housing news. First, he says, lots of people have been calling a bottom since, well, since the top. Second, that wrongness doesn't obviate the fact that prices will cease falling eventually, at which point bottom callers will become correct and doubters incorrect. Third, based on prices and inventories, we don't have the support we need to call a bottom, yet.

Hard to argue with any of that. ... I would not counsel optimism at the moment.

But I will argue that optimism isn't an absurd state of mind. Looking at Case-Shiller home price data for the past year, and for 2008 in particular, we unquestionably see prices leveling off in recent months. For almost half of the markets involved, prices in 2008 have essentially been flat. ...

These moves may not portend an imminent recovery, but there are reasons to suspect that a recovery, once underway, will have a firm foundation. Potential homebuyers..., at present, ... generally see no reason to buy because the expectation is that prices will continue to fall. Why purchase now at $200,000 what you can get in two months at $190,000?

If it begins to seem that further declines are not a sure thing, however, those buyers will rush in..., the rush at the bargains will solidify the bottom, and potentially lead to a substantial upward revision in some markets.

The other critical point is in credit markets. As long as prices continue to fall, the full extent of the losses banks can expect is unclear. As such, banks will jealously guard their assets so as not to be caught undercapitalised by markets looking for blood. An apprent price bottom should begin to fix this problem. ... The combination of new credit with buyer interest should lay the groundwork for stabilisation. ...

And the other issue is this: once the credit crisis is resolved, housing needn't be a national issue anymore. Supply did not overshoot equally in all markets. When better borrowing conditions return, tight markets should quickly decouple from loose ones. That won't mean an end to pain for many, but it will mean an end to the national housing depression.

The question, of course, is when. I'm not foolish enough to guess. But there are reasons to find encouragement in the latest price data.

Update: From Richard Serlin:

Housing prices can't Drop too much. The Good far outweighs the bad.: In response to Mark Thoma's post today...:

"Are we near the bottom? Is the end near? I wish I could answer yes"

Mark, please think very carefully about this. Do you really wish housing prices would stop falling? Do you really think it would be better to have housing be more expensive? Do you really think the costs of lower housing prices outweigh the benefits? Do you really think it's better to preserve the wealth of a minority of wealthier homeowners and investors, at the expense of the middle class and poor, who are really hurt by high home prices? I know most of the middle class own homes, but they can't benefit from higher home prices unless they move to a smaller or otherwise less desirable home. Their children, on the other hand, can be devastated by high home prices. ...

Lowering of housing prices, over the long run, does immensely more good than bad. It's a great thing. They can't go too low. What if they went to 1 cent for the average home? That would be bad? Over the long run that would make almost all families and individuals immensely more financially secure, to have just a trivial mortgage or rent payment. The lower the better for housing prices. The good this does far far outweighs the bad. For more details, I have a brief paper regarding this.

    Posted by on Wednesday, August 27, 2008 at 10:44 AM in Economics, Housing, Weblogs | Permalink  TrackBack (0)  Comments (26)


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