Correction to “What House Price Falls Really Look Like”
Who says Twitter is just fluff? Well, I did before Max Keiser and Stacy Herbert persuaded me to sign up. I’ve since realized that it’s rather like a modern version of the old-fashioned news wire services for the public. Choose who to follow, and they’ll keep you updated on things that interest you. If that happens to be Kylie’s waistline or Kurt’s fidelity, that’s your problem, not Twitter’s.
One Tweet that I received told me something that didn’t seem right from my own data: that CPI-deflated US house prices were now within reach of their long-term average (i.e., 1890 till now). From my figures—which I had cobbled together from Robert Shiller’s first edition “Irrational Exuberance” data supplemented by the S&P Case-Shiller Index, adjusted for inflation—prices had fallen a lot, but still had a long way to go.
So I went back to Robert Shiller’s home page, checked his updated data, and sure enough—real US house prices were now “only” 15% over their long term average.
Though this certainly doesn’t mean that house price falls in the US are almost over—having overshot by so much, there is every prospect of them going well below the long term average before they stop falling, especially given the unprecedented mortgage debt from which households are still deleveraging. But it means the day that real US house prices stop falling is closer than I thought before Twitter alerted me to this problem with my data.
Though US house prices have now returned to their 1986 level, mortgage debt has not. All the “froth” pumped into the market by 30 years of rising mortgage debt has now gone, but the level of mortgage debt is far higher.
This is why house prices could fall a lot further in the USA—even though they’re now a relative hair’s breadth from the long term average. As I’ve argued regularly here, the real driver of change in asset prices is the acceleration of debt. I won’t go into the details here—I’m rushing to get this post up before I am on a panel today at the Australian Property Council’s annual gabfest—but I’ll let the next two charts speak for themselves.
[note, the Greenspan peak in the graph below as when Alan Greenspan said there was no US housing bubble - which was exactly at the peak of the bubble]