No end in sight to the housing bust

By Felix Salmon
May 26, 2009
This is the Composite-10 index; the National and Composite-20 indices are similar, and in general show house prices at their levels from 6-7 years ago; all the same, the length and severity of the drop in house prices is still just a fraction of what we saw on the way up: we had a ten-year boom from 1997 to 2007, and there's no particular reason why the bust shouldn't last just as long -- especially given the natural stickiness of house prices on the way down. " data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

The done thing when the Case-Shiller index comes out is to look first at the first derivative — how fast is it falling? Then people look at the second derivative — is the rate of decrease slowing down or speeding up? And if there’s no optimism there, you can always find it somewhere. The official press release leads with a graph of the first derivative over time, and then adds this:

“This is the second month since October 2007 where the 10- and 20-City Composites did not post a record annual decline. Based on the March data, however, we see no evidence that that a recovery in home prices has begun.”

I don’t think we needed an index to tell us that. But it is worth taking a step back and looking at the level of the index, rather than just its rate of change:

caseshiller.png

This is the Composite-10 index; the National and Composite-20 indices are similar, and in general show house prices at their levels from 6-7 years ago; all the same, the length and severity of the drop in house prices is still just a fraction of what we saw on the way up: we had a ten-year boom from 1997 to 2007, and there’s no particular reason why the bust shouldn’t last just as long — especially given the natural stickiness of house prices on the way down.

And what of stories announcing a “new frenzy” of house-buying in Phoenix, poster-city for the housing bubble? I think this could be a sign of a real two-way market developing, with the number of buyers approaching the number of sellers. That’s good for price transparency, but it doesn’t tell us anything about the future direction of house prices: liquid markets can fall just as easily as they can rise. And, in this case, probably will.

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