I remember way back then when everything was true and when we would have such a very good time, such a fine time, such a happy time. And I remember how we’d play simply waste the day away. Then we’d say nothing would come between us two dreamers. Our house, in the middle of our street, our house, in the middle of our … so intoned Madness in their 1983 hit song.
I was just interviewed by a reporter who wanted to discuss the various housing price indicators. He was interested in how the now rising price of houses will impact the economy. This is actually a very interesting question because if higher home prices are a reflection of demand, then from a demand perspective housing should help drive the economy. From a supply-side perspective, increased production of shelter would also be a benefit to the economy.
However, if higher home prices are simply being driven by overly loose monetary policy…. Well, we saw the result of that in 2008, didn’t we?
Taking a quick look at the numbers, we see that the Case-Schiller index of home prices (which generally measures housing prices in large cities) bottomed out at the beginning of the year and has risen by 6 percent since then. The other major home price index, the House Price Index put out by the Federal Housing Finance Agency, measures prices in lower cost areas of the country – mainly rural, smaller cities and suburban areas. This index is also up by just over 4 percent through the third quarter.
So housing prices are definitely up this year, but what about demand? Well according to the National Association of Realtors (which puts out some pretty good statistics), existing home sales are up by 9 percent in 2012 over 2011. In other words, demand is rising for homes, and this is being reflected in prices. So far, so good.
Now the million dollar question, is demand for homes a reflection of demand for housing services? This is important. If new homes are being purchased in order to provide a useful service (a roof over one’s head) then they are part of the real economy and housing would be accretive to the economy. However, if homes are just being purchased in the same way as other hard assets like gold or copper, the higher demand may simply be due to investors hedging inflation.
Here the data do not paint as rosy a picture. In fact, according to the Bureau of the Census, homeownership rates have not budged in 2012 – they are stuck at about 65.5 percent. This means that home sales are rising faster than population and faster than new household creation, suggesting that much of the increase in housing prices is due to investor hedging rather than actual growth in demand for housing. While not as striking as the asset bubble that occurred during the Greenspan loose money period, this increase in housing prices appears to be little more than history repeating itself during the Bernanke loose money regime.
Seems that not much has come between these two Federal Reserve dreamers. Inflation is simply that, inflation, and does not in this case seem to signal any sort of recovery. I remember way back then, when everything was true……..