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Home Publications Blogs Beat the Press Homes Prices are Plunging: Let's Talk About the Deficit

Homes Prices are Plunging: Let's Talk About the Deficit

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Wednesday, 01 December 2010 07:59

The media almost completely overlooked the housing bubble on the way up. In the years 2002-2007 there were probably 1000 stories written about the deficit for every story that raised any questions about house prices being inflated.

Of course the bubble did eventually burst, giving us the worst economic disaster in 70 years. But hey, no one ever said that an economics reporter could learn anything. Yesterday's Case-Shiller data showed that house prices in its 20-City index fell 0.7 percent in September. This would be an 8.5 percent annual rate of decline, which would imply the loss of more than $1 trillion in housing wealth over the course of the year.

The data for the bottom third of the housing market looked even worse. Prices for homes in this segment of the market had a 2.6 percent one-month decline in both Seattle and Boston. They fell by 3.4 percent in Phoenix and 3.7 percent in Portland. Prices for homes in the bottom tier fell by 3.9 percent in both Tampa and Chicago. They fell by 7.0 percent in Atlanta and 7.4 percent in Minneapolis.

The sharp decline in house prices in the bottom tier since the expiration of the first-time buyers tax credit means that the loss of home equity for many recent buyers will have exceeded the value of the credit. In such cases the credit effectively went to the seller, or in the case of underwater mortgages, to the bank that held the mortgage.

For one more interesting data point, the Census Bureau released data on new home sales prices for October last Wednesday. This release reflects much more up-to-date data since it is based on contract prices. The Case-Shiller index is a 3-month average that is based on closings, which typically occur 6-8 weeks after a contract is signed. The report showed that the price of a median home fell 13.6 percent in October hitting its lowest nominal level in 7 years.

These data on falling house prices were largely invisible in business and economic news reporting yesterday. Instead, the focus was the budget deficit and the deficit commission reports. After all, if we don't do anything and the deficits follow their projected course, we will have a really high budget deficit in 2025.

What does it take to get economic/business reporters to pay attention the economy?

 

Comments (10)Add Comment
A speedy decline
written by jwo, December 01, 2010 9:15
Yesterday's Case-Shiller data showed that house prices in its 20-City index fell 0.7 percent in September. This would be an 8.5 percent annual rate of decline, which would imply the loss of more than $1 trillion in housing wealth over the course of the year.


This strengthens my opinion, that I have held from the beginning of the crises that a sharper faster decline would have been better. If there was no TARP more banks would have failed home prices would have dropped like a rock to the point were value buyers and investors (cheap cautious people) and upstarts (young people with no debt) would start buying them up. Unemployment may have reached 20% but I think might have started to recover in 6 months to a year. Of course the fed would have had to buy a lot of stuff to pump money into the economy. I would have gone as far as to have the fed buy stocks to pump money into investors hands! I would also have eliminated the FICA tax.
What does it take to get economic/business reporters to pay attention the economy?
written by foosion, December 01, 2010 9:28
It would have to be a development that affects them personally and directly and it would have to be something simple enough for a child to understand.
Rational Ignorance and the Supreme Hayekian Vision of Free Markets
written by izzatzo, December 01, 2010 9:33
What does it take to get economic/business reporters to pay attention the economy?


Rational ignorance is rational when transaction costs are infinite. Any economist knows that Hayek was correct that only a free market can account for the total flow of information in general, far too massive and chaotic to be interpreted by individuals, much less government.

One change that would help tremendously is to get rid of all the price indices produced by the government which just create confusion by creating biased expectations, made even worse by reporters dabbling around the edges of the information monster.

For example, everytime Baker reports that house prices and wealth is falling, it just causes a self fulfilling prophecy and they end up actually falling. Then when they don't fall, Baker complains that bankers are holding them up for themselves by interfering with a free market that needs to reduce house prices from pre-bubble levels.

Socialists like Baker need to stop trying to control free markets. They're too big to monitor, much less manipulate. Let the flood of capitalism's bounty seek its own level driven by the invisible hand from the ground up, not from the top down.

Individuals may be blind in the Hayekian sense at the ground level, but when left alone by government to function at the aggregate level of free markets, they acquire a collective vision so powerful it can see through bubbles like overprescribed and overpriced MRI scans.
Panic selling/ stable markets
written by Scott ffolliott, December 01, 2010 9:35
"the fed buy stocks to pump money into investors hands! "

It seems the Fed has been buying stocks for some years now in its use of funds directed at putting a base to the futures or options market to keep stocks from to large of a drop that would cause panic selling
...
written by joe, December 01, 2010 9:56
10% unemployment and a 1 trillion dollars of wealth going up in smoke but we better worry about the deficit because something bad might happen if people don't want to buy treasuries.
Washington is different
written by AndrewDover, December 01, 2010 12:07
The Washington area is an exception to the country as a whole, hence it is no surprise that policy makers and pundits don't have the same depth of feeling about housing prices.

Some Washington Case-Shiller numbers:
251 May 2006
235 May 2007
199 May 2008
169 May 2009
182 May 2010

185.85 June
187.77 July
188.16 August
188.79 Sept
Other side
written by uber snotling, December 01, 2010 2:34
While lower housing prices are painful for homeowners, they are good for home-buyers and indirectly can be helpful to renters.

People hurt by lower home-prices include those who bought more house than they could afford, people who had unanticipated economic hardships and are forced to sell, banks, bondholders, and US backed mortgage institutions.

However, given the massive subsidies forked over for home-ownership relative to renting, this renter is not so sympathetic to most of those hurt by the decline in housing prices and will gladly buy a home at the lower prices.
...
written by John Smith, December 01, 2010 7:44
The removal of housing from the economy is something to be grateful for. Perhaps people are starting to view houses as places to live that have costs associated with them rather than speculative vehicles. Prciing now is based upon real demand for a living space. That is a good thing, but I'm sure it will soon be forgotten about as the next "real estate investment" frenzy begins all over again.
...
written by John Smith, December 01, 2010 7:48
For those unconcerned about the deficit (such as this blogger) I ask: "So what will the US do when bond investors lose confidence that they will get their money back and yields and CDSs explode?" Surely the Greece, Ireland, Spain, Portufal experience should teach us something. Or is the US strangely immune?
...
written by Richard, December 02, 2010 8:13
Let's talk about the bottom third of the housing market. I suspect that the prices for these homes fall much further, as most have no value, they are small homes built 30 to 50 years ago, that have multiple hidden problems. The only thing that gave them value was the easy mortgages. Speculators came in, gave them a quick face lift, and then unexperienced buyers lured by the promise of quick appreciation came and bought these worn out structures by the millions. Only to find out, there is more to owning a house than paying the mortgage.

Yes, these homes truly are toxic, but not assets! Local governments should confiscate them from the banks, and mortgage companies, and bulldoze them. Local governments should tell banks, either get them occupied, or lose them.

Reducing the supply of these structural junk heaps would be a great help to the economy, and the housing market!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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