New at Reason: Why Housing Prices Keep Falling and the Myth that Homeownership Builds Wealth

Home prices are continuing their decline, as new data released by the S&P/Case-Shiller Housing Price Index today show. For the top 10 major metropolitan areas, prices declined 1.1% from January to February, and 2.6% from February 2010 to the present data. The Case-Shiller HPI also shows a decline for their 20-city index, calling 1.1% in the last month of data, and 3.3% from February 2010 to February 2011.

“There is very little, if any, good news about housing,” the Wall Street Journal quoted David M. Blitzer, chairman of S&P’s index committee, as saying. Plus, a Wells Fargo report said the foreclosure crisis indicates homebuilders have a long road ahead. And, yesterday, Morgan Stanley estimated that prices will drop a total of 6 percent to 11 percent for the year. Why the continuous freefall?

In this month’s Ahead of the Curve newsletter, we take a look at the mistaken belief that homeownership is an indispensable investment asset that all must own. In fact, housing prices really don’t grow that much on a national basis over the long-term when adjusted for inflation. Rather they are a good store of value, more of a savings account.

Furthermore, what wealth building power can come through building equity has been on the decline. The average equity in homes has fallen from 80 percent in the 1950s to 38.5 percent today. That is not the ownership society foreseen by President George W. Bush at all.

Federal subsidies just created a bubble that has to deflate back to housing price norms. And until prices get to that point, the housing market will struggle. As Rep. Barney Frank (D-MA) said last year, it was simply a mistake to push poor people into homeownership before they were ready. And now we have to wade through foreclosures, the shadow inventory of homes, and the adjustment of supply and demand before housing is back on the right track.

To see how this all breaks down, see this month’s Ahead of the Curve commentary, The Myth of Homeownership Wealth Creation.