CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Real House Prices Still Down: WaPo Has Not Heard of Inflation

Real House Prices Still Down: WaPo Has Not Heard of Inflation

Monday, 10 March 2014 05:24

The Washington Post had a piece explaining the seeming anomaly that cash-out refinancing is still well below bubble levels even though house prices have recovered much of their ground. The piece explains this gap by the fact that homeowners are a wealthier group on average than they were in the bubble years and therefore less likely to tap equity for spending.

While this is in part true, the more obvious explanation that is that inflation adjusted house prices are still almost 30 percent below the peak of the bubble, which is a good thing. It is also likely that homeowners do not expect continually rising house prices as they did in the bubble years which would make them less likely to withdraw equity from their homes.

As a practical matter, it is not plausible that the decline in moderate income homeowners could explain much of the $200 billion drop in annual cash-out refinancing between the bubble peaks and 2013. The homeownership rate has fallen by a bit less than 4 percentage points from its bubble peaks, translating into roughly 4 million fewer homeowners. For a $200 billion drop in annual cash-out financing to be explained by this loss of moderate income homeowners, we would have to believe that these moderate income homeowners had been cashing out $50,000 a year on average from their homes.

Given that this group would have had limited equity in their homes and their homes would have been lower priced than the average, it is implausible that on average they would have been cashing out even one-fifth of this amount. But hey, why mess up a good story with arithmetic?

Comments (4)Add Comment
written by MacCruiskeen, March 10, 2014 8:19
Who would be surprised that there is less cash-out refi? During the Great Bubble, equity spending was driven by the same factors as the bubble itself: extraordinarily loose credit, rapidly rising prices, and the irrational belief that the party would never end. Homeowners were encouraged to think of equity as being like a bank account they could make free withdrawals from. People learned the hard way that borrowing against your equity is still debt, which remains after your equity has gone away.
Refi only works on the way down
written by Dave, March 10, 2014 8:32
Cash out refinance only makes sense when long-term rated are consistently dropping. If there is a new boom in consumer borrowing, it will probably lean on home equity loans rather than refinance because rates have hit bottom.

I don't believe any such boom exists yet either, because most of those inclined to participate are still short on equity.

The danger of a new bubble outside of consumer spending would mostly show in a decrase in home affordability for new buyers right now.
written by Jim, March 10, 2014 1:17
This is another instance of journalistic ineptitude:

written by kharris, March 11, 2014 2:37
At very least, lazy journalists should fall back on conventional wisdom. This time, we don't even get that. There is a fairly easy-to-comprehend standard explanation for bubble behavior, much of which serves to explain home equity withdrawal (see MacCruiskeen above). Can we at least not suffer through entirely made-up lame explanations?

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

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.