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House Prices and the Economy

Monday, 21 February 2011 06:06

The Washington Post, which completely missed the $8 trillion housing bubble whose collapse wrecked the economy, is still having a hard time understanding house prices. It notes that the Case-Shiller 20-City index is a moving average of sales closings for the prior three months. And, there is typically a 6-8 week period between when a contract is signed and when it closes. It therefore tells readers that the December data to be released on Tuesday:

"should reflect the autumn lull in the economy. The question is whether the improved economic outlook over the past few months will translate into a firming up of home prices in early 2011."

Actually no. Short-term ups and downs in the economy will not be reflected in house prices. The main factor pushing house prices lower right now is the end of the homebuyers tax credit. This credit, which could be used for homes contracted before April 30th (and likely closed before the end of June) pulled many sales forward from the second half of 2010 and even 2011 into the first half of the year. Prices began to fall as soon as the credit ended.

It is easy to see from the data that the credit was driving the housing market, not short-term economic fluctuations. House prices stopped falling and actually rose somewhat in the second half of 2009, a point where the economy was still losing jobs, as people rushed to buy homes before the expiration date of the initial credit in November of 2009.




The main factor in the housing market is the further deflation of the housing bubble. People who understand the housing market expect prices to continue to drop until the bubble is deflated. This means a price decline of another 10-15 percent over the next year.
Comments (4)Add Comment
written by Arne, February 21, 2011 9:11
"House ... rose somewhat in the second half of 2009, ..., as people rushed to buy homes before the expiration date ... in November of 2009."

So why did thwy rise somewhat in 2010

written by Ethan, February 21, 2011 11:31
There were two periods for the first time home buyer tax credit. The initial period expired in November 2009. The extension period expired April 30, 2010. The initial tax credit pulled purchases forward to contracts signed before the end of November, 2009, and closed mostly in December, 2009, and January, 2010. The extension period pulled purchase forward to contracts signed before the end of April, 2010, and closed mostly in May and June, 2010.
written by Floccina, February 21, 2011 1:44
Great post, I hope that we get there quick. It may over correct on the down side which will be good for buyers.
written by Richard Hodde, February 22, 2011 1:29
Agree with everything you wrote. But isn't there a calculation factor to consider in the house price data? If 50% more homes were sold, but the average or median price of those sold homes is significantly below the previous average/median price, would not the data show that home prices are declining? My point, assuming I am correct in the way these numbers are calculated, is that home prices can rise or decline because of a shift in the price distribution of sold homes, regardless of whether home sales are weakening or strengthening.

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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.