Tuesday, January 16, 2007

Professor Case’s Jittery Eye


Karl Case, Professor of Economics at Wellesley College and co-creator of the S&P/Case-Shiller Home Price Index recently gave a series of presentations on housing to both the Federal Reserve Bank of Boston’s New England Study Group as well as Harvard University’s Joint Center for Housing Studies.

In the first of a series of policy briefs derived from those presentations entitled “The Changing Housing Market: A Bang or A Whimper?” Case recaps some of the factors that contributed to the extraordinary 15 year housing run as well as the prospects for the future.

As for contributing factors, Case includes interest rates and easy lending, Market psychology, stock market refuge, foreign demand, supply restrictions and Baby Boomer demographics.

Although, for Boomers he notes that, unexpectedly, it appears that Boomers view housing like previous generations viewed cars and other durable goods that consumers might own more than one of.

As was noted before, the 2005 National Association of Realtors Second Home Owner Survey shows that Boomers interest in second homes only just recently perked up and that the overwhelming majority of second home purchases were not for leisure but were, in fact, purely for investment.

Now though, Case notes that there has been a “sea change” in the housing market.

As for the changed factors, Case suggests that there has been a shift in the national psychology fueled by a steady stream of “popping” housing bubble magazine covers as well as the unsustainable disparity between household income and median home price, overbuilding and sub-prime mortgage meltdown.

Interestingly, Case also cites the Baby Boomer demographics as a “drag” on housing as retired “empty nesters” either downsize from higher price markets for lower or trade single family housing for urban condos.

This illustrates a point that has been made here many times, namely that many of the convenient arguments that have been promulgated in an attempt to justify the current run-up in home prices are fragile and can be argued convincingly, even by the same author, from both positions (i.e. either for or against support for the home price run-up).

Case concludes this segment of the series by stating:

“I currently lean toward the softer—though not easy—landing scenario. But it would not
take too much to make a softer landing much harder. A recession or rising long-term interest rates are among the factors that could turn a soft landing into a harder one. So too could another factor that is difficult to quantify: a continuing negative housing market psychology. Like everyone else, I’ll be watching out with a jittery eye.”


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