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Home Publications Blogs Beat the Press NYT Says Homeownership Advocate Doesn't Realize House Prices Are High

NYT Says Homeownership Advocate Doesn't Realize House Prices Are High

Wednesday, 26 February 2014 05:53

The NYT had an article on Bruce Marks, a housing advocate, and his push to extend credit for home buying to moderate income households who are now being excluded because of bad credit ratings. At one point the piece tells readers;

"He [Marks] says low interest rates and housing prices have created a second chance — an opportunity to help lower-income families buy homes, but this time on terms they can afford."

Actually, house prices are not low. While they have not returned to bubble peaks, they are well above trend levels. This means that people buying into the current market have a substantial risk of losing money on a home. This risk will be especially high if interest rates rise in the years ahead, as is almost universally predicted. 

Comments (10)Add Comment
Bubble Question
written by bill, February 26, 2014 11:04
Housing prices today are about where one might expect on a nominal basis if house prices had risen with inflation since 2002. You wrote a persuasive paper in 2002 that housing prices at that time were about 11%-22% above trend. (or maybe that they needed to fall 11%-22% at that time to return to trend. I'm working from memory). But since we're 11.5 years on from 2002 and the economy has a fair amount of slack, I think it might be time to reevaluate the projections from 2002. I think something has shifted that trend.
yes but in 2002 we heard the same arguments...
written by pete, February 26, 2014 11:16
Housing advocates (some directly funded by Fannie and Freddie) were of course quite contributory to the bubble, combined with Wall Street greed. Nader questioned F&F big time, to no avail. Strange bedfellows bringing down the economy. A perfect storm, crony captilalism at its best. Homeownership skyrocketed during the bubble. Thus the composition of owners, in addition to the values were an issue. The same calls for lax standards as Mr. Marx (oops Marks) now advocates led to horrible abuses. And of course we remember Krugman's little joke from August 2002 that Greenspan needed to spark a housing bubble while Shiller and Baker were shouting correctly that we were in a bubble! Keep up the good work Dean, but no one will listen. 10% a year is just a fabulous tease. Probably a better expected payoff in real estate today than a lottery ticket.
2002 Bubble?
written by bill, February 26, 2014 3:21
I was looking at the Shiller Case chart on Paul Krugman's blog. It looks to me like the approximate change in housing prices since mid-2002 has been about 32%. That's eyeballing, so call it 30%-35% over 11+ years. Say 2.6% per year. If I called something a bubble and 11 years later prices had risen more or less with inflation, I'd rethink the bubble appellation. Now, if I called it a bubble in 2004, 2005 or 2006, then I'd be psyched. But 2002 appears pretty reasonable in hindsight. At least according to the chart Paul Krugman posted.
see the bubble?
written by Squeezed Turnip, February 26, 2014 5:45
Median house prices (from FRED)

So look at the trend from 1980 to 2002: you see increasing variability, which has also been a constant feature since 2008 (increased variability even) which means higher risk. Low/medium-income folks don't need to throw money into highly variable prices.

Looking at the continuously compounded annual rate of return on house prices, we see pretty high rates, given that the overnight rate is pretty much 0, unlike the 90's or 80's.
good graph
written by bill, February 26, 2014 6:14
Squeezed Turnip,
Would you know how to do that price graph on a log scale?
written by watermelonpunch, February 26, 2014 7:31

Um... you know what would help lower income people afford housing better?
Maybe wages that are not so stinking stinking low!
new homes are a problem...use Case Shiller, same home sales...
written by pete, February 27, 2014 3:30
The problem with new homes is that they are typically not representative of the entire market. Case Shiller looks at resales, i.e., trying to hold all else constant. Another good measure is own/rent, which is about where it was in 2002, too high.
second chart is the log, annualized
written by Squeezed Turnip, February 27, 2014 3:51
hi bill, The second chart is basically log of the prices (base e, not base 10, and it's annualized (thus basically inflation adjusted since inflation was low during the latter part of the period), so it's rate of return over the previous year.

The second chart is also for ALL transactions not just new home sales, so that gives a more realistic view of the situation. The volatility of the rate of gains in home prices should give buyers pause: yet another reason to not buy a house for short-term needs or goals.

I'm not sure I'd agree that own/rent is necessarily a good measure, if policy is determined to increase that ratio in some viable sustainable systematic way.
cost of owning v. cost of renting...sorry wasnt clear
written by pete, February 27, 2014 5:42
Cost of owning v. renting should be stable in the long run. Regarding forcing ownership back up to its crisis highs, using a viable sustainable systematic way, this seems problematic if not pollyanish.
written by Squeezed Turnip, February 27, 2014 5:55
problematic for sure, and somewhere along the way it turns to pollyannish, but where that occurs could still be explored; if home prices were more stable then maybe it would make sense to have more people own, but those variations above indicate that even long-term owners should either have a lot of time or money on their side.

It seems to me that the ownership to renter ratio should still rise some in the coming years as the population ages, but eventually there's either death or retirement/nursing homes (or kids) so it should be rather temporary. Maybe I'm overlooking something, though.

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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.