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Home Publications Blogs Beat the Press Nonsense on the Housing Market Makes Page One at WaPo

Nonsense on the Housing Market Makes Page One at WaPo

Saturday, 22 March 2014 08:02

The Post gives us its latest concern about the housing market, telling us that higher interest rates will cause people to stay in their current homes where they have locked in low mortgage rates for long periods of time.

"The higher rates, soaring home prices and a tight inventory have kept potential buyers on the sidelines, hurting the sales of previously owned homes and undermining the recovery of the housing market, a huge contributor to economic growth."

The problem with this line is that the housing market has recovered pretty much all we should expect. In the mid-1990s, before the bubble began to dominate the market, existing home sales averaged about 3.5 million annually. If we adjust upward by 20 percent for population growth, we should expect existing home sales of around 4.2 million.

In fact, they have been running at around 4.8 million, considerably above trend levels. This is partially offset by lower than trend sales of new homes (this is due to the fact that unusually high vacancy rates are still discouraging new construction). However this piece is focused on explaining a weakness in the housing market that does not exist.

The piece also misrepresents the scenario we would face if interest rates rise further, implying that this will directly make housing less affordable. It ignores the fact that higher interest rates will likely lead to lower house prices. This will not completely offset the impact of higher interest rates on monthly housing costs, but the almost inevitable drop in house prices will alleviate the impact on higher interest rates. It is bizarre that the piece never mentioned this fact.

Comments (12)Add Comment
"[T]he housing market has recovered pretty much all we should expect"
written by Paul Mathis, March 22, 2014 9:18
New home sales in the U.S. are now below the level of 50 years ago!


Real house prices are less than 10% above their level of 25 years ago.


Higher mortgage rates are the wrong policy.
Real house prices
written by Dennis, March 22, 2014 9:45
Paul, it not clear to me why you think real house prices SHOULD be more than 10% above their level of 25 years ago. Are house prices supposed to be a perpetual motion machine that continues to rise above the rate of inflation year after year? In the face of wage growth that is lower (for all but the top quintile) than the rate of inflation?

If so, why and how? Now that most households are two-earner, there are no more earners to start contributing to the mortgage, unless we start allowing polygamy :-)
Yes, new home sales are weak because high vacancies are slowing construction
written by Dean, March 22, 2014 9:45
vacancy rates remain at very high levels, which is why builders are building relatively few new homes. Real house prices generally don't rise, so the fact that they are 10 percent above the level of 25 years ago is a reason to be concerned they are over-valued.
Real House Prices
written by Paul Mathis, March 22, 2014 10:27
Dean & Dennis,

Real house prices have gained considerably since 2012 when 30-year mortgage rates in the 3% range spurred sales and the effect on the economy has been strongly positive. The long range trend from 1976 is also has a clearly positive slope.

Real house prices represent the principal store of value and wealth for the middle class so they are very important to our economy and society. Housing expenditures are also the primary component of consumer demand which is 70% of aggregate demand in our economy.

As Bill McBride said yesterday: "One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA's Ed Leamer went so far as to argue that: "Housing IS the Business Cycle." http://www.calculatedriskblog....oWWc1hj.99

New home sales are below the level of 50 years ago because demand for new houses, even now 5 years after the Great Recession hit bottom, is still very low. The result has been a very slow recovery where the jobs lost during the Great Recession still have not been fully recovered.

We can do much better at stimulating demand for housing, but instead we are facing 6% mortgage rates as the Fed continues to taper QE and then raise rates. Our economy will be in a slump for many years to come as 2% growth becomes the new normal and China surpasses us.

Paranoia about another housing bubble is suppressing economic growth and job creation. We should remember FDR: "the only thing we have to fear is fear itself."
written by djb, March 22, 2014 10:53
High home prices ..

Rising interest rates

And tight inventory could only exist if someone was buying houses

To them that the things that prove housing market is doing well

Is causing the housing market to no do well?
written by djb, March 22, 2014 10:58
To then say thaf the things that prove the housing market is doing well

Is causing the housing market to not do well

Is stupid

Meant to say
written by watermelonpunch, March 22, 2014 11:42

Um... okay so is it factored in that on top of the housing bubble creating more new home construction & sales than was actually even needed... And I'm assuming there has to be some stabilization with that at least.

Also the economic situation for the past 5 years has led people to go back to family arrangements more similar to 50 years ago, where single adults lived with their parents.
I know so many more people in their 30s now that live with parents & grandparents, either to take care of an aging or ill family member, or because of financial reasons of their own, or some combination of both, than I did 10 or 15 years ago.

And a lot of this is about wages being very terrible & unemployment still being a problem.

Who is it we think should be needing to, and having the money to, buy lots of new houses?
Real house prices fell between the end of WW II and 1975
written by Dean, March 22, 2014 12:13
That was the period of our greatest growth. If the argument is we need a housing bubble to spur demand -- I can think of better ways.
There's your problem:
written by Dave, March 22, 2014 2:23
"In their study, Hendershott and his colleagues created a statistical model of housing turnover from 2005 through 2011 in Illinois’ Cook County. It found that if home prices rose by 10 percent in one year, and interest rates climbed one percentage point annually for the following three years, the housing turnover in strong markets fell 75 percent.

The model was meant to simulate changes that are underway as the Fed scales back its support of the economy in general, and housing in particular."

Hugh? I know what happened and when it happened during that time period. There's nothing in that time period that matches the conditions in which they are trying to predict housing turnover. This is a meaningless application of statistics.

where to grow from here?
written by Squeezed Turnip, March 22, 2014 2:58
I agree with Dean, there are better (and more sustainable) areas for investment than housing (private residential investment is around 5% of g.d.p. and about another 10% for housing services (rents, e.g.). Manufacturing accounts for about 15% of g.d.p. Which has the greater multiplier? For manufacturing, its about 1.32, for housing it's about the same. Why not focus on boosting manufacturing, say by addressing the trade deficit?
written by kharris, March 24, 2014 8:39
The memory of ever-rising home prices (sic) is strong. The impact of a higher cost of mortgage borrowing cannot be lower home prices, so higher borrowing costs must necessarily lead to slower purchases.

Well, in a lot of cases, when there is more than one possible response to a change in inputs, we get a little bit of each possible response. Home prices may fall or rise less quickly, sales may slow relative what would have happened at lower rates.

If one has been writing about real estate for a while, though, one learns not to talk about falling prices. Sources in the real estate market don't like it.
Interesting column in Huffpost
written by Dave, March 25, 2014 1:56

I found this column rather interesting because I'm trying to plan a move to a high-tech center for a new job, and I recently traveled to CA to determine if it would be livable for a family. My conclusion is no based upon housing prices, commute times and the resulting culture of the industry there. In general, the housing conditions are only suitable to people who have lived their most of their lives and were already invested in housing, or to those who are young enough, have no families and like to live at work.

Now we are considering Austin Texas because of the housing prices. This will likely be the determining factor. Texas state politics are hard to stomach, but Austin politics are not bad.

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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.