June 12, 2011


The Sickness Beneath the Slump (ROBERT J. SHILLER, 6/11/11, NY Times)

Consider this: Home prices rose nearly 10 percent a year on average in the United States from 1997 to 2006, long enough for many people to become accustomed to the pace and to view it as normal. The conventional 30-year fixed mortgage rate averaged 6.8 percent over those years, far below the appreciation rate on housing, so even if you had a substantial mortgage, you were becoming wealthier by the day, at least on paper. People who owned a home over that period had reason to feel pretty well off and proud of their investment acumen. That fed a contagion of optimism and helped to drive the speculative bubble, propelling the economy and the stock market in a feedback loop that repeated year after year.

Professor Case and I have conducted annual spring surveys of home-buyer attitudes for many years. We ask about long-term expectations: “On average over the next 10 years how much do you expect the value of your property to change each year?”

The survey we conducted in spring 2005, near the end of the bubble, included 407 home buyers. In it, the median expectation for home price appreciation over the next decade — until 2015 — was 7 percent a year. That is substantially less than the 10 percent a year that Americans had recently experienced.

But expected increases of 7 percent a year still implied another doubling of home prices by 2015. And about a quarter of our respondents in 2005 anticipated increases of at least 15 percent a year for the next decade. Something was very wrong with this picture, but few noticed it.

As it turned out, of course, those expected increases didn’t happen. Instead, home prices tumbled 34 percent nationally from the peak in the first quarter of 2006 to the first quarter of 2011 — or 40 percent in real terms — and they still appear to be falling.

In 2005, the newly re-elected President Bush was pushing, as his two main goals, immigration reform and Social Security accounts. The former matters in particular to the set of facts above, because the immediate addition of 14 million new legal buyers to the housing market and the anticipated follow on of some 100 million Americans, from both immigration and fertility, made an expectation of rising housing prices entirely realistic. [Indeed, even without such a massive inflow of new immigrants, we are not currently producing enough housing to meet current population growth.]

The Right needn't have any grasp of human decency nor much of economics to comprehend that if you retard demand you impact prices. Looked at objectively, it seems fair to say that they decided that the recession was a small price to pay for a "whiter" America.

Posted by at June 12, 2011 7:44 AM

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