by Tyler Cowen
on February 28, 2016 at 3:37 pm
in Current Affairs, Data Source, Economics
That is from Sober Look.
Guess when everyone wants it to happen and we socialize costs, it will happen.
Let’s pop open the bubbly – it’s back to money for nothing, and the chicks are free.
I’m deeply skeptical of this graph. I don’t have the data to refute it or support it. Anyone have supporting evidence? It may be that since they are pulling from across the US this is true, however, it just seems unlikely. I lost 50% of the value, to get back to even, I need a 100% increase. I just don’t see these kind of numbers on average. Even if it was a smaller loss, say 20%, the gain would have to be 40%.
I’m curious how the numbers have worked out to have this kind of recovery in home prices.
All real estate is local, so you are right that a national average bears no relation to particular cases. I would expect very large deviations across a national sample, with some locales screaming back up to 2005-6 levels quickly and others doing nothing.
As of 2014, the ten best cities were still at -12.9% against 2006 prices. Two years later the average is even with the peak? Seems unlikely.
So yeah, all real estate is local, but back-of-envelope math suggest that the data set used for the graph was lacking.
Again, I don’t have actual evidence.
Is Denver (where I live) a “ten best” city? Because it was back to 2006 levels more than a year ago and continued rising straight through 2015.
Yup, very large deviations about the central trend – http://www.economist.com/blogs/graphicdetail/2015/11/daily-chart-0
Also, if you lose 20% you only need to go up 25% to get back to even not 40%.
I still am not believing that the market is back to the peak.
Additionally, the banks still haven’t foreclosed on some of the properties that have been abandoned since 2006.
Maybe that’s how they get the numbers – abandoned houses don’t count.
Come to think of it, are those figures based only on houses that have sold? If so, my conclusion would be that in areas with lots of loans underwater, there’s not much buying and selling going on. Wouldn’t that bias the numbers in the upwards direction?
Your skepticism may be warranted. The graph above shows nominal housing prices that are not adjusted for inflation. Here is how housing prices look after adjusting for inflation:
The prices in real terms are nowhere near their 2006 peak.
Thank you for that.
The difference between these graphs is not inflation, the difference is one looks at new houses and the other looks at all transactions.
The real purchase only series is also nowhere near back to peak
Your math is off. If you lost 20%, the gain would have to be 25% to get back to even.
In the local markets I pay attention to in Michigan, prices have surpassed their 2005 peaks, but it’s hard to control for quality, since a lot of renovations/new construction has taken place.
So, why isn’t housing construction running at the rate it was in 2005?
Is it the requirement these days that real estate developers pay all the costs of public infrastructure because of the cuts to government spending to pay for tax cuts?
Developers must pay for roads that meet the minimum standards set by governments that will be required to take them over and maintain them. Developers can build cheaper roads, but they must maintain them forever by levying fees on the property they serve, with government requiring bonds and security to prevent the taxpayers demanding government fix the roads in a bailout of the developer.
Developers must pay for water and sewer/septic that will not come back to the taxpayers after the developers are gone.
In many places, real estate developers are expected to kick in for new schools for the kids that will be born in the new housing.
Back in the big government tax and spend era, governments borrowed money to build roads and water and sewer and schools so real estate developers could build housing for families. Tax rates had to be hiked to finance the bond issues up front.
Growing up in the 60s, taxes were a topic of civics class and while we were never told anything close to “tell your parents to vote for the tax hike to fund the school bonds”, I knew that it was the slow approval of tax backed bonds that kept my schools crowded and the reason for alternating between a 6:30am and 10:30am school start time once I started the 7th grade.
Today, living in NH, zoning is designed to keep out kids that need public schools to prevent hikes in taxes. Only towns with houses starting at $500,000 have growing schools. But with corporations desperate to avoid paying wages high enough for such housing, NH attracts people in mid-life with kids soon to leave home, and leave NH, because being young in NH even with a college degree is hard because of high housing costs and thus high taxes.
Housing construction is heavily demographic. Before the Boomers, construction was in nominal numbers a good deal less.
This graph isn’t adjusted for inflation either which wasn’t told as well.
I’m having trouble understanding why developers paying the costs of building their own roads/sewer/septic is a bad thing.
Isn’t one of progressivisms causes to slow down development? If you want a house in a brand-spanking-new-suburb built on previously undeveloped land, why shouldn’t you pay extra for the build-out of the water and sewer?
You’re having trouble understanding it because you’re reading a mulp post. He doesn’t make logical points. He just rambles and blames Ronald Reagan for everything.
My California home is back to near top, and it is a hot business locally to covert commercial to residential. (It is a zone within two miles of the beach that is no longer efficient as commercial RE.)
So, either housing is back in a bubble, or those who called a housing bubble in 2002 obviously had no idea what they were talking about.
Oh, so many more possibilities.
But on the “those who called a housing bubble in 2002 obviously had no idea what they were talking about.”
Maybe home prices are now correctly priced. If I eyeball the 1990-1998 price appreciation, it ends up about where we are now.
Eyeball regression is my favorite kind of regression.
Brian Donohue is a devotee of Scott Sumner, who claims there’s no such thing as a bubble if prices return to their former highs in the future. This is absurd, since by definition the future is unknowable and at the time of a crash people have no idea when prices might return to their highs. One year? 500 years? It would be cold comfort if prices today for tulips, nominally, were greater than they were at the height of the Tulip Mania crisis of the 17th century. Something about Keynes and stormy seas comes to mind.
The real issue is whether it follows long term trends going back 6 or 7 decades. Looks to me like it does not. Ipso facto, we have entered another bubble (unless there are some underlying structural changes in the housing economy that I am not aware of).
Yup. It’s a bubble. No doubt about it.
I think there is a structural change: it’s harder to build anything now.
But a period of low housing starts is exactly what you need for the bubble to inflate. At a certain price, new homes will start sprouting like mushrooms, and that’s how the bubble bursts.
Not in the areas with housing restrictions
Case Shiller isn’t. Its real prices are clearly back on the old trend. Try some more graphs.
Is this supposed to be good or bad? Are we supposed to be happy that if we’re making mortgage payments on a house, when we sell it the price will be more than our cumulative payments, including taxes, interest, depreciation, etc? And we’re also supposed to be happy that if we buy a house now, eventually we’ll come out ahead in the same way? That seems to be the attitude that caused the real estate implosion in 2007.
We can be happy homeowners if prices rise.
One of the danger signs in the mid-2000s was that the prices in a zip code area were higher than could be afforded by recorded income for the area
(Census data). That is, you could only make it work by adding wealthier outsiders.
You can do that some places, but hard to do everywhere at once.
Terrible for young people, good for Baby Boomers. Therefore we need housing prices to be as high as possible, to keep the narcissistic amoral Boomers fat and happy. Sort of like how society desperately needed sex drugs and rock and roll when they were in their 20s, desperately needed tax cuts when they started earning good money in the 1980s, and desperately needed Medicare part D when they started to need lots of prescription drugs to stay alive.
“Terrible for young people, good for Baby Boomers.”
Having a positive derivative of the index is good for young people. Having a high absolute value is bad for young people.
“Nominal house prices are between 19 and 36 percent above their recessionary trough and between 5 and 7 percent below their pre-recession peak (Figure 2-19). However, in real terms (measured relative to the general rise in consumer prices), house prices still remain roughly 20 percent below their pre-recession peak.” https://www.whitehouse.gov/sites/default/files/docs/ERP_2016_Chapter_2.pdf
Here’s a tweet with Figure 2-19 which shows more house price indexes: https://twitter.com/MarkusEconomist/status/702132032495874048
Much more meaningful graphs from Bill McBride here:
As noted by one of the ever so well informed commenters here, Bill McBride is a leftist. And thus, all his data and conclusions are to be dismissed out of hand. The right hand, of course.
I don’t read CR all the time, but it seems pretty good to me. I don’t find McBride to be leftist. He blogs a lot of analysis and backs up his numbers.
What a crazy world where we celebrate massive increase in the cost of a good that everyone needs to purchase.
^ ^ ^
Have you ever bought a house?
Did you take out a mortgage?
Do you understand the concept of leverage?
Falling home prices crush people with mortgages.
Seriously. 30 year mortgages are essentially modern America.
I know that pisses off some of the libertarians, but let’s not burn the whole system down, please.
Let me guess, modernity started May 18, 1954.
Modernity started with the end of the early 1980s double-dip recession. You can probably mark the Great Recession as the beginning of a New Era.
A bit of a jump from lamenting a “massive jump” to fearing a decline.
For a long time same-home sales tracked inflation. Satisfying both of you?
> Falling home prices crush people with mortgages.
If they bought as an investment rather than where they plan to live.
If you’re not treating your home as an investment then what kills you are falling wages or any other thing which causes the real value of your mortgage or the real cost of your mortgage payments to go up. If you don’t plan to sell then the market value of your home just is what it is.
What if you have to sell your home because you were unexpectedly laid off, or need to transfer jobs, or face some substantial medical expenses, or need to move back in with your parents, or any of a million other things that might cause someone to sell home besides “investment”?
This is true, but for a lot of people, home equity is the only form of net worth. Watching your net worth being erased and going negative, yippee.
But I’m sure none of you were ever first time home buyers who took out mortgages.
Perhaps many are trapped with homes as their only savings, but a whole range of tax advantages accounts are supposed to guide them to better financial management.
Let’s all shed a tear for people whose highly levered bets go sour. Can we next have a pity party for Long Term Capital Management?
Real appreciation of home equity forces the next generation to incur even higher debts, which process can’t be sustained.
20:1 levered bets on illiquid assets with high transaction costs are risky? Wow never would have thought of that. Still, we *need* very high homeownership rates because something something American Dream. I’ve got it! Let’s bend government policy at the Federal, State, and Local level to trying to make sure that prices monotonically rise faster than the rate of general inflation. What could possibly go wrong?
The argument for home ownership is pretty simple. You want your citizenry to have a tangible stake in your country. Maybe it’s misguided, but it’s not hard to understand.
30-year mortgages were around for at least 50 years before our systemic blow-up. So yeah, lax lending standards, ninja loans, a Fed that doesn’t understand the signals it was seeing, etc. But the principle of financing a long-term asset with a long-term liability is not, per se, the source of the problem.
Did you ever personally engage in such recklessness as taking out a mortgage, John et al?
The 30 year mortgage works great for someone who buys once in their mid-twenties, and pays it off by mid-fifties. It works less well for new-moderns who take on 30 year loans in fifties or sixties.
I don’t know how old you are but there have been mortgage driven blowups before 2008. In fact, I’m not sure there’s been any 30 year period since the government put in place the 30 year mortgage that hasn’t contained a housing market crisis and subsequent distress in some bank or shadow bank sector.
Even leaving aside Freddie, Frannie, and the FHA the 30 year fixed rate mortgage with no prepayment penalty at a small spread over the risk free rate only exists because of the implicit government put. Bankers know they can collect nickles in the good years and be protected from the steamroller in the bad by Uncle Sam. At least in the 80s a few scapegoats went to prison.
Personally, I’ve never had a mortgage and never plan to.
“Have you ever bought a house?
Did you take out a mortgage?
Do you understand the concept of leverage?
Falling home prices crush people with mortgages.”
Yes to 1-3. However, we put 20% down on our house, and its purchase price is <2x my income, so it losing value isn't a huge deal for us.
Why… here, you’re all businessmen here. Doesn’t it make them better citizens? Doesn’t it make them better customers? You… you said… what’d you say a minute ago? They had to wait and save their money before they even ought to think of a decent home. Wait? Wait for what? Until their children grow up and leave them? Until they’re so old and broken down that they… Do you know how long it takes a working man to save $5,000? Just remember this, Mr. Potter, that this rabble you’re talking about… they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath? Anyway, my father didn’t think so. People were human beings to him. But to you, a warped, frustrated old man, they’re cattle. Well in my book, my father died a much richer man than you’ll ever be!
George Bailey, “Do you know how long it takes a working man to save $5,000?”
That’s easy. About 6 months or even less.
As I read John’s comment, his remark was about “massive price increases”, not “falling home prices”. The lack of the former doesn’t compel the existence of the latter, does it?
If by “massive price increases” one means housing prices exceeding the general rate of inflation (roughly, wage inflation), then whether this is good or bad would strike me as a question of “for whom”. Sure, if one is an existing home owner, “massive price increases” are great, assuming those folks don’t want to move up to a better or bigger home. But, have you ever been a renter or an aspiring home owner, Brian? Surely, you have been–it’s nearly a generational inevitability. House price increases that exceed wage price increases are not going to help those folks, nor will leverage.
Yeah, fair point. My comment was not really responsive to John’s.
It seems clear to me that “massive price increases” (i.e. well over and above inflation) are mostly driven by building restrictions, because they seem to be confined to a handful of locales, but I might be wrong.
Is the cost of home ownership as a % of income a lot higher in Kansas than it was a generation ago.
There’s a recent thread over at Askblog about the effect of zoning. I’m sure there’s an effect, but I think many vastly overstate it (generally, those with strong libertarian priors and a hammer…).
OK. Do you happen to know the story on home prices in the hinterlands? I don’t, I’m genuinely curious, but I’m not sure how to find such data.
Point being, if some areas of the country haven’t seen “massive price increases”, it must be down to some particular factor in places that did see such increases, and building restriction leaps to mind.
Here’s an affordability index:
This deals only with existing single family homes. In eyeballing the stats, it appears that SF is one of the least affordable and Detroit the most. There’s quite a gap. I’m sure that to some extent zoning plays a role in SF (along with geography that zoning won’t change). However, when considering why the very large disparity between these two locales, “zoning” is not the first thing that comes to mind, and certainly not the only thing…
The issue here is that homes are largely positional goods and therefore even without a bunch of truisms going around about a home being a great investment, American Dream, et cetera, they will inevitably rise in price to soak up all the new money constantly being minted, right up until the next inevitable asset price crash.
What do you mean “we,” kemosabe? I do not need to purchase a house, I need to sell one. We are all born without a house in our portfolio, and we die without one. So we buy and sell the same number of houses over our lifetime.
Fuck you, I’ve got mine. The motto of the Baby Boomer generation.
You say that like it’s a bad thing.
Another trend I think is interesting is that the number of homes per capita has been decreasing since 2006. I think there is a need for more housing units as household size decreases. There’s a FRED plot here, but the link does not take you to the graph of the data with operations done on it. If you enter a/b in the formula bar, it will appear.
The chart of housing starts at the bottom this Idiosyncratic Whisk post makes me think that it’s to be expected prices will rise if you restrict new supply so severely.
Doesn’t this mean that with enormous effort the monetary authorities have brought us back to 2006?
I feel reassured.
What enormous effort was that Derek? I didn’t think electronically printing up money and buying up debt was that hard.
1. Nominal dollars/prices are a useless metric.
2. All real estate is local to hyper-local. National numbers are a waste of electrons.
Debts are nominal, house purchases are usually financed in nominal amounts, so I would argue that from the point of view of a borrower or lender nominal prices are exactly what you need understand.
Case-Shiller nominal 20 city index still about 10% below peak, and that is nominal. Not sure what the source of the data for this graph is.
The data source is the American Dream, and one’s faith in it.
If the markets are following the price of oil, why should the Fed worry about interest rates?
We need to raise interest rates! I am a home owner (no mortgage) and wouldn’t mind if prices came down to earth even if that means “losing value” in my house.
We have declared war on saving in order to inflate home prices. This won’t end well.
I hate anecdotal data, but I can’t help myself. I’ve built custom homes in Austin (I know, not typical) for 20 years; this is the first time I’ve seen people -knowingly- building homes that are 30% underwater at completion. This won’t end well.
San Marcos is the new Austin. Granbury is the new Dallas.
The chart is of purchased houses only and that can be very easily distorted.
When housing is weak builders drop out of the bottom of the market and focus on the higher end of the market where demand holds up better. Despite the rebound from the cyclical low, new homes purchased are still less than 50% of sales at the peak.
But this creates a major distortion of the average price measures because it is skewed strongly towards the upside.
Case-Shiller created their repeat sale price index because almost every other measure of home prices is badly distorted by problems like this.
2006/7 peak, not 2005
I’ve definitely seen price increases on the west coast in Seattle and San Francisco. To some extent both of these have been fueled by technology companies and oversees money from China. Not sure if it’s enough to constitute a bubble yet.
However, Vancouver, BC is definitely in bubble territory – for a city similar to Seattle (but maybe half the GDP) houses can cost twice as much.
For a good time, I spot-checked a few local listings on Zillow (I know, I know, but it should be comparable at the aggregate level). A house in the Seattle city limits or one of the expensive suburbs is generally worth 10-20% more than it was in late 2007. A condo close to downtown Seattle is worth slightly more than it was in 2007 but condos elsewhere still haven’t recovered. Everywhere else in the region, prices are about 10% lower than they were in late 2007.
If you really want stability, try a depressed logging town. Prices haven’t changed much in years.
It would be interesting to see the corresponding time series of the number of sales pairs associated with that HPI, and additionally, expressing that quantity as a fraction of the outstanding stock of houses. I would expect trading to appear thinner than pre-recession times, which might call the usefulness of the HPI into question.
All real estate is local. So here’s my condo price, adjusted for inflation (Chicago area).
Nov 2007 sold (note past the 2005 peak)
Nov 2009 sold for 73% of Nov 2007 price
August 2015 sold for 82% of the Nov 2007 price.
There are a lot of areas that are still behind the peak. So what areas are ahead of the peak?
Or, are these numbers being distorted because the action (at least in the Chicago market) seems mostly at the high end?
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