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No improvement so far in housing prices

The October Case Shiller home price data released today seem to have revived the calls for a housing double-dip. Prices were a bit lower than expected, and according to the broader measure of prices (a composite of 20 large markets), they are now at a new post-recession low in real terms (but only by a hair). But whether the recent modest decline in prices is the beginning of a new major downturn in prices remains to be seen; it could be just temporary, and in any event it represents price action from the third quarter of last year, which was a period we now know was somewhat of an economic soft patch.

The bigger picture is that both indices show housing prices have fallen about 35% from their 2006 highs in major markets, which also happened to be the areas with the most froth at the peak. Coupled with an almost 25% decline in mortgage rates since 2006, the effective cost of buying a house dropped by some 50% in just four years. The real question today is whether that price drop is sufficient to elicit enough buyers to purchase the large (but presumably still shadow) inventory of foreclosed homes that are likely to be hitting the market over the next year. Even as housing prices have declined significantly, new household formations have continued and the population has grown.

Have prices fallen enough to clear this market? I continue to think they have. The economy is clearly on the mend, and incomes and jobs are rising. New home construction has declined to de minimis levels. Perhaps there is some further weakness in store, but surely we have seen the lion's share of the weakness by now. It hasn't happened before, but that is no reason it can't: housing is likely to be supported by an expanding economy this time around, whereas before it was housing that gave an important impetus to the economy. New jobs and economic growth can take care of a lot of excess housing inventory, and easy money, relatively low mortgage rates, and a gradual easing of lending standards can take care of the rest. It's time to put concerns about the housing market on the back burner.

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