The index of housing prices calculated by the folks at Case-Shiller has been the only index that has registered significant price declines in recent years. It's not based on a nationwide average of housing prices, however; instead it focus on 20 major metropolitan markets, and those are the markets where apparently prices have fallen the most. Regardless, the index has now registered hardly any decline at all in the past three months, and actually increased 0.5% in May. This might be the first clear sign that we are at or very near the bottom in housing prices. As the chart also shows, prices in inflation-adjusted terms have dropped 36% from their peak—certainly enough to change the dynamics of the housing market going forward.
Case Shiller is highly misleading as it is inflation adjusted. No housing index anywhere else does this. Banks do not lend on an inflation adjusted basis and buyers and sellers have never been aware of anything but nominal price. Thus, Shiller's almost daily commentary about buyers being "under water" and losing value, "mailing in the keys" was based on a measure never used in the history of price measures and he gained great notoriety. Nominal prices are a better indicator and while down, they were never as disasterous as presented by Shiller.
ReplyDeleteHey Scott, a little off-topic (okay, a LOT off-topic), but awhile back readers complained of popups from your website (actually, blogger.com). A good solution to this is by using Mozilla Firefox as a browser (rather than Internet Explorer). No more popups.
ReplyDeleteseeking: The data in the chart was inflation-adjusted by me, using the PCE deflator. Did you know that Shiller is now turning optimistic on the housing market?
ReplyDeleteCabodog: Thanks for the update. I think your solution is the correct one. I use Apple's Safari and Firefox, and I have never gotten popups on any blogger site. I don't know why people keep using Internet Explorer.
ReplyDeleteScott,
ReplyDeleteIn addition to using broad deflators for housing, I also use a narrow deflator for housing investment. It has run at a lower rate than the PCE deflator over time due to commodity disinflation (before the explosion in commodity prices), offshoring of manufacturing, lower labor inflation (due to substitution of US labor by "guest" labor), and a few other secular trends.
Dale