Commentary

There Is No Housing Price Stabilization

A headline from August 31: “More Evidence That House Has Stabilized.”

This is not from the future, though news reports today citing a third straight month of growth in the Case-Shiller Index measuring housing values would suggest many are now writing stories for tomorrow with that headline. However, this headline is from August 31, 2010. Last year at this time, the Case-Shiller numbers came out and showed positive numbers for housing values and it some argued we’d reached the bottom. Even the Wall Street Journal ran a piece saying, “Home prices appear to be stabilizing…”

Unfortunately, nothing was further from the truth.

Today, a year later, we have a similar Case-Shiller report and are seeing similar talk about the stabilization of housing prices, on news that housing prices gained 1.1% from May to June 2011:

Bloomberg: “Home Prices in U.S. Showed Signs of Stabilizing”

TradingPoint: “U.S. home prices stabilizing”

ChattanoogaNews: “Local, national numbers reflect stabilizing housing market”

And again, unfortunately, nothing could be further from the truth.

The problem is that these sources are citing non-seasonally adjusted housing value numbers. Non-seasonally can a good metric to see what is happening in the housing market in real time (well, real time with a two month lag, but its all relative). However, it is not a good metric for gauging the overall trend of the housing market—at least going month to month. The reason is that we always see movement like this in the spring. Consider the below chart showing in gray the February to June period each of the past three years—you’ll note monthly non-seasonally adjusted numbers always tick up in this time, only to collapse the following months.

CSI_MoM_Data_Jul_2009-Jun_2011

A much better predictive trend is the year-over-year measurement. Looking at the data from a year ago, we see not a 1.1% increase as from May to June, but a 4.7% decline from June 2010 to June 2011. There is also bad news in the seasonally adjusted data, which James Groth covered on this blog earlier today. An even more ominous statistic is the 9.6% fall in inflation adjusted housing prices from the second quarter of 2010 to the second quarter of 2011.

We all want to see the housing market recover, but we are going to have to accept a redefinition of what a stable and healthy housing market looks like. Falling housing prices in a way are good news since we’re still in the housing bubble and need prices to decline further before there will be sustained recovery. And we’re going to have to accept that housing is more a store of value (like a good savings account) than a great investment tool with high return on investment.

Until we see that mental shift we’ll continue with flubs like this blog post by Scott Grannis on SeekingAlpha last year at this time:

“it looks like the housing market has found a new equilibrium clearing price level… I continue to think that prices have fallen enough to at least hold steady at current levels for the foreseeable future. As the top chart shows, there has been a 33% decline in inflation-adjusted housing prices from their 2006 peak, and that is by far the biggest downward price adjustment in nationwide housing prices in my lifetime.”

It may be the biggest downward price adjustment—but our own lifespans are not the best measure for understanding the new reality we live in.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

Follow Anthony Randazzo on Twitter @anthonyrandazzo