Questions from reporters over the last week, since the S&P/Case-Shiller Home Price Indices were reported on August 30th, were bearish. One slightly positive comment was that housing is doing better than the stock market. Another attempt at optimism came from a journalist who wanted (or his editor wanted) an article that now is a good time to buy. The economic reports that followed later in the week – flat employment and unemployment, sharply lower consumer confidence and renewed anxiety over European debts – didn’t make for an upbeat Labor Day weekend.
On whether this is a good time to buy a house: can’t say. Not just because of uncertainties, of which there are many, but because the question depends on far too many variables: location, financing, the buyer’s financial strength to mention only three. The unasked question is have prices bottomed out. Here there might be a hint: as noted in last week’s comments about the June data, prices in eight of the cities we follow have stayed above their lows for two years. In some places the lows appear to be holding.
Two weeks ago, before both the employment report and the latest S&P/Case-Shiller Home Price Indices release, Fed Chairman Ben Bernanke gave a speech at the Kansas City Fed’s annual monetary policy get-together. Between hints of more easing and other thoughts on the economy, he pointed to housing as a big reason for the weak economy. If one labels the mortgage aspects of the financial crisis as “housing” then maybe housing was one reason why the recovery was weak in 2010. A more timely question is whether housing is a plus or a minus for the economy going forward.
The chart shows housing starts and home prices, from the US Census Bureau and S&P/Case-Shiller Home Price Indices, since 1987; the shaded sections are US recessions as defined by the National Bureau of Economic Research. Housing is flat – starts are around 500,000 units annually, the lowest sustained level in decades. Prices remain some 50% above their level of 2000 before adjustment for inflation. Excluding inflation this is up about 16% in real (or constant dollar) terms, an increase of about 1.5% per year – close to long run results.
What does housing need? What the rest of the economy needs: a boost in confidence and animal spirits to encourage people to make the long term commitment and investment involved in buying a home. Housing is not a drag on the economy today — it is neutral and has the potential to spur growth once things get going.