When does a housing slump become a bust?

From the IHT:

In the stock market, we have a pretty good idea what a crash is. Among stock market experts, there is a consensus that a 10 percent decline in a major index is a correction while a 20 percent decline is more significant: a crash or a bear market, depending on the time involved.

For the macroeconomy, there is also agreed-upon terminology. For example, a recession means two consecutive quarters of declining gross domestic product.

But when it comes to declines in housing prices, there is no such framework. As experts debate whether we are headed for a housing bust, you would think that we should at least be able to define it.

I wouldn’t say something as vague as 10% and 20% point to definitions. Not with economists, anyway.

The author (Anna Bernasek) goes on,

More recently, there have been severe price declines in regional markets. The most severe was in the so-called oil patch during the 1980s. In the late 1970s, as global oil prices soared, oil-producing areas of Texas, Oklahoma, Louisiana, Colorado, Wyoming and Alaska experienced an economic boom. As oil prices collapsed in the early 1980s, those economies crashed, and housing along with them.

In the worst cases, nominal home prices fell 40 percent in Lafayette, Louisiana, and 33 percent in Casper, Wyoming, from 1983 to 1988, according to the Office of Federal Housing Enterprise Oversight. In Houston, prices fell 22 percent.

There were also sharp price declines in housing on both coasts during the early 1990s. At that time, a series of events, including the recession of 1990-91, the military downsizing after the Cold War and a commercial real estate collapse, led to a housing downturn.

She’s right: houses aren’t safe as themselves for nothing. As she also discusses, the decline in house prices isn’t distributed evenly through a macroeconomy, because a macroeconomy is nothing more than an aggregate of microeconomies. A national average of house prices doesn’t care that military bases are in dedicated, small areas. State-based averages will. The anecdotes above demonstrate this, but they also demonstrate something she did not mention in her article.

All of these significant declines in house prices followed (or at least corresponded to) exogenous economic shocks (oil prices, military downsizing – and how’s that working out, Mr. Rumsfeld?), or a recession.

This government, with its tax cuts for the rich, has managed to beat the definition of a recession, but you don’t need to be a Paul Krugman fan to have heard the words “jobless recovery” used as a popular macroeconomic adjective in the last few years. The reason, I believe, why the slump/crash issue exists here is that it doesn’t. This is a weird sort of economy, one that hasn’t been observed (at least in the US), because it is coupled with very large debt to manage, a government not particularly socially-welfarist to say the least (which is saying something at all, for the US) and the sort of financial deregulation and/or instrument not heretofore seen (or used to buy houses, come to that).

Jim Kunstler’s take on the ‘newness’ of the phenonemon is something else – and I don’t think his death of Happy Motoring is all that far off. Sub-prime lending, cheap oil, even (as I recently discussed) reverse mortgages have an effect. Wages that have gone exactly nowhere in several years now have most certainly not helped.

I’m inclinded to say neither a slump nor a crash besets us (unless house prices really do go off the side of the cliff if a recession hits later this year – although that will be standard macroeconomics, give-or-take. Certainly we dismal scientists will easily explain it away), but rather a correction – a return of housing to levels of price and ownership that match the state of the economy. We’ve been living in the emperor’s new clothes, or the cake we’ve been having and eating, probably as long as we could have expected to get away with it. Low low interest, sub-prime lending, cheap-oil commutes, all contributed to a boom not only in house-building but house-price-paying, and it had to end when those drivers ran/run out of steam.

My hope is just that it does so slowly enough, and under a government competent enough, to avoid the ‘crash’ of the crash.


Meanwhile, even as houses become less pricy, they are becoming less affordable (empathy, Australians!). From CNN (via the Big Picture):

According to the 2007 State of the Nation’s Housing report from the Joint Center for Housing Studies of Harvard University, 17 million of American households in 2005 were putting more than half their income into paying for shelter – a rise of 1.2 million from the prior year, and a jump of 3.2 million from 2001.

Mortgage rates have generally been a favorable part of the equation. Since the start of 2001, they’ve ranged from an average of 5.23 percent for a 30-year fixed in June, 2003 to 7.16 percent in June of 2006. Even after the Federal Reserve started raising its rates in June, 2004, mortgage rates stayed low.

Median income, however, has dropped. Real wages fell from 2000 to 2005, according to the report. By 2006 household income was 1 percent below 1999 levels, according to stats from the Current Population Study of the U.S. Census Bureau.

Quite a different beast than that faced in Australia. Here prices may fall, but mortgage rates have to leave their fantasy land of the last few years, and nothing, apparently, can compete with this administration’s war on real wages.


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