Tuesday, March 24, 2009

Drum Responds


Kevin Drum responds to my post on housing prices:

Mike suggests that lower mortgage rates and the upcoming stimulus tax credit will prop up prices a bit compared to past levels, and that's possible. But mortgage rates are only slightly lower today than in 2000, and the effect of the tax credit is hard to judge. I'm just guessing like everyone else (and since I have a house I'm trying to sell I'd be delighted to end up wrong about this) but I'd keep my money on a further 20% drop.

No real issues with his calculation, he was using the Composite-20 measure of the Case-Shiller Home Price Index, which looks at housing prices across 20 major cities.

I will only make a couple points (warning, this gets technical). First, the Case-Shiller numbers are delayed 2 months instead of 1 like the NAR numbers I was using, and January was a really bad month for housing prices, declining 8.3% (at least according to NAR). Also, they aren't national numbers so we weren't comparing apples to apples, if you use the national Case-Shiller numbers, the index was at 139 in December 2008. If we add in the same 8.3% January decline, the index becomes 127 and then adjusting with the GDP deflator (divide index number by GDP deflator of 123), we are at 103. That is exactly where you would expect the bottom to be, especially with all the incentives that buyers have right now.

I will hedge a little and say that you can't really "predict" anything in the current environment and it clearly depends what indexes and data you look at, the data I'm using supports a "national" bottom. Remember, this is national data, there are pockets that still have much further to fall and other areas that may be starting to recover. Finally, just because prices have plateaued, that doesn't mean they will immediately bounce back. If you look at the inventory numbers, we are still a long way away from working that off.


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