US house prices unlikely to drive economic recovery

Economic growth


US house pricesFeb13.pngWhen ‘everybody knows’ something, experience has taught the blog to become very suspicious. And when everybody knows that rising US house prices are certain to drive a US economic recovery, it becomes very suspicious:

• For a start, as the above chart shows, the prices shown in the authoritative S&P Case-Shiller Index haven’t actually risen very much at all
• November’s price (red square), the latest available, was actually the same at $158k as in November 2010 (blue) and November 2009 (light blue)
• It was also a very long way below November 2006, which was $224k

Equally, the greatest expert on US housing, Prof Shiller of Yale University, is very cautious on the outlook. He successfully forecast the 2006 collapse, and today he sees no reason for any major recovery to take place. Writing in the New York Times he warns:

“We’re beginning to hear noises that we’ve reached a major turning point in the housing market — and that, with interest rates so low, this is a rare opportunity to buy. But are such observations on target? It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don’t clearly suggest any particular path for prices, either up or down.”

He goes on to add that “any short-run increase in inflation-adjusted home prices has been virtually worthless as an indicator of where home prices will be going over the next five or more years“. Whilst on the negative side, he cites the falling rate of home-ownership (down from 69% in 2006 to 65.5% in 2012) as evidence of a secular change in attitudes to homebuying.

Plus, of course, regulators are busy trying to reduce the risk of any return to the speculative buying that drove the sub-prime boom to 2006. Shiller notes that new ability-to-pay standards from the Consumer Financial Protection Bureau “will make wild lending harder to do”.

The blog thus sticks to its argument in the Financial Times of September 2007 that the whole subprime boom was “based on an illusion”. It is most unlikely to be repeated in our lifetimes. Instead the boom should be seen as a case study in warning us to be very suspicious when “everybody knows” something that would normally seem most unlikely.


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