House Price Recap

It’s the last Tuesday of the month, and that means it’s S&P Case-Shiller Home Price Index Data Release Day. This month’s dollop continues the recent upswing we have seen in the past few months, so is not very newsworthy. (According to official Perce_cliff_house media sources, to be newsworthy it must either be a change in direction from the month before, or be down. Ideally both.)

In case you haven’t seen the numbers, which is likely, I’ll pass along the highlights. The 20-city composite was up 1.6% for July. That’s three up months in a row. The index is now up a not inconsiderable 3.6% since April.

Of course, that gain is dwarfed by the loss that went before. From July 2006 to April 2009 the index lost 32.6%. This little uptick leaves us 30.2% below the peak. And we are still down 4.2% for 2009.

Still, this is authentically good news and a welcome sign that at least one green shoot is turning into an actual plant. 18 of the 20 cities were up for the month. (Seattle lost a barely significant 0.06%. Las Vegas, however, continues it’s run of bad luck, giving up another 1.1%, making it a solid two years of at least 1% losses every month. Vegas houses are now down 54.82% from the peak.)

Even Detroit and New York, two places hit particularly hard by the Great Recession, managed to eke out gains.

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So what does this suggest about the future of house prices? The first thing that has to be pointed out is that this bottom we appear to have found in house prices isn’t, after all, really that low. Even on inflation-adjusted terms current prices are still 25% above their level of ten years ago and 48% over the trough in February 1997. The prices we see today may be as low as we are likely to see for a very long while, but this is hardly a fire sale.

As I have mentioned here before, my long-run expectation for house prices is that they will track inflation, possibly with a small region-based adjustment. (Crowded coasts to beat inflation by a smidgen, middle to fall behind by a little bit.) For as far back as we have data, tracking inflation seems to be the general trend. And I think this makes conceptual sense too. Why would a house over time become more valuable relative to other things you could buy?

So my expectation for long-run house price changes is inflation, and since my expectation for that is 3% a year or so, my expectation for house prices is 3% or so. I realize that if you are down 30% on your house, hearing that it will take about a decade to get back to even in nominal terms, and that you will never get anywhere close to even in inflation-adjusted terms, isn’t what you would like to hear. Sorry.

In the short term, my not particularly accurate crystal ball foresees more modest gains for the rest of this year as we work out the dead cat bounce. As things continue to calm down, i.e. as it becomes increasingly clear that the scary free-fall is over, potential buyers who were standing on the sidelines will step in and push prices up some. But the supply of these buyers will be exhausted by next year and I think prices will get really dull after that.

(Fears of the expiration of the first time homebuyer credit at the end of November seem overblown to me. Two million buyers will have taken advantage of it by then, but the great majority of those would have bought a house anyway. In the context of the five million or so existing houses that get sold in a year, this is not the big scary deal many seem to think.)

One of the oddities of the C&S release schedule is that it often (always?) coincides with the Conference Board’s release of its consumer confidence survey. And for reasons that escape me, the media tend to give the survey top billing. Today’s mid-afternoon reports were about the gloom of an essentially flat consumer confidence number with a mention of a minor glimmer of hope on the housing front. This seems backwards to me. That people are willing to put up a serious chunk of their life savings, and borrow several times that, to buy a house is a much better indicator of confidence than what they told a pollster when they called one night.

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