Low, Stable Housing Prices: What’s Not to Like?
The Case-Shiller Housing Price figures for March were released Tuesday, and they reveal a second month of modest price increases.
These slightly rising prices don’t portend a housing comeback. Instead, the seasonally adjusted figures illustrate that since March 2009, we’ve been bumping along the bottom of the housing market, just as we did for six years after the last housing bubble burst in 1991.
Although a new surge in housing prices might improve the macroeconomy, there is plenty to like in low and stable housing prices, and that’s what we should now expect in a world free from bubbly delusions of constant price appreciation.
The two-month increase in the Case-Shiller 20-city index between January and March 2012 still leaves us only 0.2 percent above the post-2006 market bottom. In real terms, the 20-city index is about where it was in March 2000. The 10-city index, which goes back to the 1980s, is about the same today, in real terms, as it was at the end of the Ronald Reagan presidency. Let’s hope that U.S. homebuyers will never again believe the lie that housing is a fail-safe investment strategy.
On average, the Case-Shiller cities have housing values that are 90 percent of their values in May 2009, when the market hit its first bottom. After that, prices began rising, abetted by the homebuyer tax credit. But when the credit expired in May 2010, prices fell again until February of this year, with the exception of a one-month uptick in April 2011. The homebuyer tax credit may explain the extra gyration in this downturn that was missing from the price drop of the early 1990s.
Fifteen of 20 Case-Shiller cities have prices today that are 83 percent to 97 percent of their May 2009 prices. Two cities, San Francisco and Washington, have done unusually well, with housing prices that are essentially unchanged from 2009. Three cities -- Atlanta, Chicago and Las Vegas -- have been poor performers, declining an additional 20 percent in real terms since then. Atlanta and Las Vegas were epicenters of overbuilding, and Las Vegas’s unemployment rate remains at 12.1 percent.
By contrast, the unemployment rate in the Washington area is 5.5 percent, thanks in part to an era of big government. If we turn to the longer-term picture, there is far more disparity between metropolitan areas, but the differences in price patterns are relatively easy to understand using the simple concepts of supply and demand.
From 1992 to 2012, real housing prices shot up by more than 40 percent in Boston and Denver, and by about 30 percent in New York and Portland. Over that period, real prices fell by 26 percent in Atlanta, 30 percent in Detroit and 34 percent in Las Vegas. Long-term price growth appeared primarily in places with a skilled population and a shortage of new housing.
Among metropolitan areas with more than 1 million people in 2000, Boston and Denver were two of the 10 most-educated, with more than one-third of adults with college degrees. They also have a dizzying array of land-use restrictions that restrict supply. Portland, Oregon, is also known for its barriers to building.
Detroit and Las Vegas are among the least-skilled large metropolitan areas; only 16 percent of adults in Las Vegas had college degrees in 2000. Las Vegas was the easiest bubble to call, because there are few barriers to building in unincorporated Las Vegas and outside the urban core. The Atlanta area’s education base comes close to rivaling Boston’s, yet housing prices in the two areas have moved in opposite directions over the last 20 years.
The most natural explanation for this divergence is a different attitude toward new construction. Atlanta’s prices are low because the city has built and even overbuilt, and, as a result, the area’s population has grown by 30 percent over the past 10 years. By contrast, the Boston area’s population, held back by a lack of construction, has increased by less than 4 percent.
The contrast between Atlanta and Boston explains why I’m not unhappy with the prospect of low and stable housing prices. Homeowners, like myself, have lost from the drop in prices, But homebuyers have benefited an equal and offsetting amount.
Cheap homes make it easier for young families to buy. Given that our public policies tend to be rigged against the young, who will have to pay the cost for our current deficit and extraordinary spending on Medicare, I can’t begrudge them the benefit of lower housing prices.
In the long run, we should expect to see prices stay low in most of the U.S. We have an abundance of land. The U.S Census reports that there were 117 million households in 2010. So every U.S. household could have more than an acre of land and we’d all still fit into Texas.
Meanwhile, building technology continues to improve, which should push down the cost of construction and housing. Housing prices can only stay high in areas that limit construction and that enjoy hypercharged economies and attractive amenities -- which is why San Francisco and New York remain so expensive.
I may cheer for affordable housing in the long run, but there is little doubt that falling housing prices played a crucial role in creating the recession. Too many of our financial institutions were long on housing-related assets, and when prices dropped, the entire system neared the edge of collapse. Low housing prices today trap homeowners who would like to sell and move to greener pastures, but can’t because they’ve lost their down payments. It is hard to move past the mortgage default crisis when so many homeowners are underwater.
The work of Karl Case, Robert Shiller and John Quigley (who sadly died this month) demonstrates that there is a housing wealth effect on consumption. High housing prices in the early 2000s may have mitigated the macroeconomic effects of the Internet bust. Low housing prices today mean thriftier households that consume less than they might otherwise.
The 1990s offer us one upbeat message. Housing prices stayed static for six long years after 1991, and in real terms, housing prices were no higher in 1998 than they were in 1991. Yet real GDP grew an impressive 28 percent between 1991 and 1998. It’s a myth that the housing market must recover before the larger economy can surge.
The one sector that will not boom until housing markets come back is construction. From 2003 to 2008, the U.S. added 9.3 million units to its housing stock, and the number of vacant homes increased by 3.4 million. Construction can only come back when we work through that excess housing inventory, and that process has been slow. The rate of household formation was incredibly modest during the downturn, as young people increasingly chose to live at home. Eventually, though, construction will return to the level needed to satisfy the still growing U.S. population.
I see no reason to think that this period of housing-price stagnation will be shorter than the six-year stagnation of the 1990s. I hope that housing prices continue to be modest for decades so that ordinary Americans can afford to buy, and I see little good in government policies, like the homebuyer tax credit, intended to artificially boost housing prices.
My greatest hope, however, is that prospective buyers have learned the lesson of the past decade: Housing prices go down as well as up. The right reason to buy a home is not as an investment, but as a place to live a fulfilling life.
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