Drop Foreseen in Median Price of U.S. Homes - New York Times
The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.
Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.
The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.
While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.
“For most people, this is not a disaster,” said Nigel Gault, an economist with Global Insight, a research firm in Waltham, Mass. “But it’s enough to cause them to pull back.”
In recent years, many families used their homes as a kind of piggy bank, borrowing against their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing has soared since 2001.
Now, however, that financial cushion is disappearing for many families. “We are having to start from scratch and rebuild for a down payment,” said Kenneth Schauf, who expects to lose money on a condominium in Chicago he and his wife bought in 2004 and have been trying to sell since last summer. “We figured that a home is the place to build your wealth, and now it’s going on three years and we are back to square one.”
On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade, according to Moody’s Economy.com, a research firm.
Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for home buyers.
It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump.
[....]
Housing prices have previously declined for long stretches in various regions. Most recently, prices fell in California and in the Northeast during the recession of the early 1990s.
The current slump is different from that one, though, in both depth and breadth. In fact, the national median price rose only slightly faster than inflation from 1950 to the mid-1990s.
But as interest rates fell and lending standards became looser, prices started rising rapidly in the late 1990s, even in places like Chicago, which had rarely seen a real estate boom. The result was a “euphoric popular delusion” that real estate was a can’t-miss investment, said Edward W. Gjertsen II, president of the Financial Planners Association of Illinois. “That’s just human nature.”
[...]
For all the attention that the uninterrupted growth in national house prices received, some economists argue that it was misplaced. The Case-Shiller index, which many experts consider more accurate than the government measure, did show a drop in prices in the early 1990s. (Unlike the government’s measure, it includes mortgages of more than $417,000, which are not held by Fannie Mae or Freddie Mac.)
After adjusting for inflation — the most meaningful way to look at any price, economists say — even the government’s index fell in the early 1990s.
Dean Baker, an economist in Washington who has been arguing for the last five years that houses were overvalued, said the idea that house prices could go only up had fed the bubble.
“It was very misleading,” said Mr. Baker, co-director of the Center for Economic and Policy Research, a liberal research group. There are a lot of people, he said, who bought “homes at hugely inflated prices who are going to take a hit. You also have a lot of people who borrowed against those inflated prices.”
The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.
Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.
The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.
While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.
“For most people, this is not a disaster,” said Nigel Gault, an economist with Global Insight, a research firm in Waltham, Mass. “But it’s enough to cause them to pull back.”
In recent years, many families used their homes as a kind of piggy bank, borrowing against their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing has soared since 2001.
Now, however, that financial cushion is disappearing for many families. “We are having to start from scratch and rebuild for a down payment,” said Kenneth Schauf, who expects to lose money on a condominium in Chicago he and his wife bought in 2004 and have been trying to sell since last summer. “We figured that a home is the place to build your wealth, and now it’s going on three years and we are back to square one.”
On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade, according to Moody’s Economy.com, a research firm.
Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for home buyers.
It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump.
[....]
Housing prices have previously declined for long stretches in various regions. Most recently, prices fell in California and in the Northeast during the recession of the early 1990s.
The current slump is different from that one, though, in both depth and breadth. In fact, the national median price rose only slightly faster than inflation from 1950 to the mid-1990s.
But as interest rates fell and lending standards became looser, prices started rising rapidly in the late 1990s, even in places like Chicago, which had rarely seen a real estate boom. The result was a “euphoric popular delusion” that real estate was a can’t-miss investment, said Edward W. Gjertsen II, president of the Financial Planners Association of Illinois. “That’s just human nature.”
[...]
For all the attention that the uninterrupted growth in national house prices received, some economists argue that it was misplaced. The Case-Shiller index, which many experts consider more accurate than the government measure, did show a drop in prices in the early 1990s. (Unlike the government’s measure, it includes mortgages of more than $417,000, which are not held by Fannie Mae or Freddie Mac.)
After adjusting for inflation — the most meaningful way to look at any price, economists say — even the government’s index fell in the early 1990s.
Dean Baker, an economist in Washington who has been arguing for the last five years that houses were overvalued, said the idea that house prices could go only up had fed the bubble.
“It was very misleading,” said Mr. Baker, co-director of the Center for Economic and Policy Research, a liberal research group. There are a lot of people, he said, who bought “homes at hugely inflated prices who are going to take a hit. You also have a lot of people who borrowed against those inflated prices.”
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