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Housing price stability




According to the Case Shiller index of home prices in 20 major markets around the country, housing prices have been roughly stable for 18 months. In nominal terms, prices have actually risen by almost 5% from last year's lows (on a non-seasonally adjusted basis they are up about 7%); the chart above shows prices in real terms, which are up only slightly. Relative to early 2000, when the housing boom was only just getting started, prices in real terms are up only 16.5%, but real personal income is up 20.6%. And since mortgage rates have fallen from over 8% in 2000 to a mere 4.25% today, housing affordability has skyrocketed; homes today are effectively cheaper than they have been in many decades. It's not surprising, therefore, that the housing market is clearing, and has been clearing for quite some time.

I am well aware of all the many forecasters calling for a renewed bout of housing price weakness, to be brought on by banks dumping tons of foreclosed homes on the market. But I am more impressed by the confluence of positive fundamentals: We've had 18 months of relative price stability, which no doubt owes something to the lowest mortgage rates in history. The housing market has had almost 5 years to adjust to new realities, and during that time, home building activity has dropped nearly 75%. Residential construction is now by far the smallest relative to the overall economy (2.5%) that it has ever been. As a consequence, excess home inventories have been reduced to a substantial degree, and prices in real terms have adjusted downwards by more than one-third. The economy has been recovering from recession for 16 months; incomes are rising, and employment is rising. All measures of money are growing at very healthy rates, and the Fed is undertaking extreme measures to ensure that monetary conditions present no obstacle to further recovery.

Taken together, these facts strongly suggest that the housing market stabilization we have observed over the last year or so is the real thing, not just a chimera.

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