Please pardon our brief hiatus. The Paper Boat has been docked while other projects were afoot – projects with deadlines that have finally just passed, allowing us to return at last to open waters. It’s been a month since I’ve written and so much has happened on the economic front I’m not sure where to begin! Perhaps with the topic of robo-signed foreclosures? California’s massive government job losses? The looming public employee pension crisis? The widening inequality of income and destruction of the middle class? My instinct amidst the chatter is to return to the cause at the crux of this great economic downturn we find ourselves immersed in: the housing market.
This blog has been accused on occasion of presenting too negative a view. So as I return to the helm to set a fresh course, I will make a concerted effort to offer my dear readers some good news today… and fortunately I do have some, hot off the press. Housing prices are falling again! I am exhilarated just putting the words into print. This isn’t just for the pleasure of spouting off a righteous “I told you so” in regards to the vast overpricing of homes for sale we are still seeing out there in the field. That is actually quite satisfying, but even better is the feeling of warm reassurance that we continue to cleanse the market of make believe. The truth sets us free, and it just plain feels good to know that prices are continuing to move toward just and sustainable levels once again.
The widely followed Case-Shiller index, which tracks home price trends in 20 cities nationally, just released its data for August, and it seems the expiration of the housing tax credit program was indeed followed by a return to declining home prices, as we at the Paper Boat had anticipated it would be. Prices of previously owned existing homes fell 0.2% in August nationally. This led chairman of the Case-Shiller index committee at Standard & Poor’s, David M. Blitzer, to declare officially that “home prices broadly declined in August.”
Despite its accuracy and popularity, the Case-Shiller index is a lagging indicator, with trends showing up two months after they have taken place. Other indexes may provide a more up-to-the-minute account of what is happening currently. Market tracking firm Clear Capital includes data from September, and has just issued a special alert on a dramatic change observed in their index of US home prices over the past two months. The report warns “national home prices have declined 5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the expiration of the recent federal home buyer tax credit. This significant drop in prices, in advance of the typical winter housing market slowdowns, paints an ominous picture that will likely show up in other home data indexes in the coming months.”
Okay, so they call it “ominous”- and certainly there are implications of a possible negative impact on the broader economy here- but I am tickled pink. Why? Because house prices need to fall considerably still in order for solid responsible working citizens to be able to realistically afford them. The market will not be stable until that happens. When people who can actually afford to pay for their homes become home owners the market will begin to turn around and real recovery will be possible. We are in the midst of a vast economic contraction brought on by the bursting of a huge housing bubble. The economy is shrinking through the destruction of credit availability and faux housing wealth. We are basically experiencing the painful disintegration of a massive ponzi scheme economy that was based on make believe housing wealth. This must be worked through before we can see sustainable positive growth.
Economist Dean Baker, who warned in 2002 of the emerging housing bubble and the possible devastation that it would cause to the larger economy, writes about how all gains produced in an economic bubble eventually evaporate. The eight trillion dollars of wealth produced in this housing bubble is no exception and is destined to disappear, and the sooner the better. Only when the housing market is finally allowed to return to a natural equilibrium of true affordability will we see the beginning of an end to the financial mess we are in. Only then can the economy begin to heal and grow anew. Unfortunately we are not there yet, and wasteful government programs are interfering with the downward adjustment and only adding to long term devastation. With house prices falling again we grow closer to the possibility of a meaningful recovery. That’s good news!
Los Angeles Times
Case-Shiller Index Shows Home Prices Down in August
October 26, 2010
October 22, 2010
Pierce the Housing Bubble
August 30, 2010