Making His Case: The Poet

Karl Case may be retired from teaching but he’s still very engaged in housing affairs as witnessed by his recent appearance on News Hour as well as this interesting poem he penned reciting his perspective on the housing bubble and its ongoing unwind.

Professor Karl Case Retires

I’d like to extend my warmest regards to Dr. Karl Case, Professor of Economics at Wellesley College and co-creator of the S&P/Case-Shiller home price index methodology, as it has been recently reported that he has decided to retire from teaching as a result of the onset of Parkinson’s disease.

It should be clear to readers of this blog that we all owe Dr. Case a debt of gratitude for his remarkably successful effort at shining the clear and crisp spotlight of reasoned and rigorous analysis into the formerly murky and outright convoluted world residential real estate pricing.

No longer do we rely solely on skewed Realtor provided median/average price data or ginned-up government statistics to gain perspective on what is arguably the largest and most important asset/service most of us will ever consume in our lifetimes.

But of course, Dr. Case’s career has spanned many decades and his success with the pricing of residential real estate is but one example of many shining achievements of his time in academia.

He is an excellent professor with a passionate and provocative style and, as with all great professors, truly generous and accessible to all his students, even ones who never attended a single one of his classes.

Further, although for the last few years his frequent media appearances in the newspapers and on business television were normally set in the context of the doom and gloom of the housing debacle, Dr. Case presented his outlook with a combination of his factual and analytical expertise mixed with a dose of authentic optimism, the type of which was not meant to lessen or spin the severity of the situation but merely as an expression for the well being of all parties caught in the crossfire of hard economic times.

That’s a lesson that we all (particularly those of us in the housing bubble blogesphere) could learn from.

Also, I think it’s important to note that Dr. Case is a veteran having served three years on active duty in the Army one of which was spent in Vietnam.

As was reported in the Boston Globe piece, Dr. Case plans on continuing to work, publishing the 10th edition of his textbook “The Principles of Economics” (an excellent textbook that I keep on hand at all times) and keeping up a schedule of speaking engagements.

Best of luck to you Dr. Case and thank you for all that you have contributed throughout your academic life.

Video of The Day - The Case for Optimism

Professor Karl Case discusses the state of the nation’s housing markets providing some interesting details and optimistic words.

It’s important to note that although Professor Case is hopeful for recovery, he doesn’t hesitate to remind the viewer of the tentative nature of things and to detail all the potential hazards threatening any turnaround.

Making His Case: The Slide Show!

Professor Karl Case was nice enough to send me a copy of the slide show from Monday’s lecture and I thought you all would find it interesting to peruse (good lunchtime reading!).

I wish I could also supply the quality elaboration on each slide that Professor Case provided during his lecture but possibly an alternative is to re-read his original post from August while paging through the slides.

Here’s the link to the PowerPoint slideshow entitled "The Central Role of Housing Prices in The Current Financial Crisis - How Will The Market Clear?".

The Almost Daily 2¢ - Making His Case Live!

Yesterday afternoon I had the good fortune of attending an excellent lecture given by Professor Karl Case entitled “Housing Prices and the Current Fiscal Crisis: How Will the Market Clear?”

Better yet, joining me was none other than BostonBubble marking the first time that our respective blogging personas were de-virtualized into a bona fide “real world” get-together!

Professor Case’s lecture was thorough and complete and despite covering many of the items (utilizing the exact same slides) that he touched on when he penned for me a blog post back in August, his superb ability to communicate greatly enhanced the presentation.

As for his overall estimation of where housing may be headed, Professor Case was sure to remind the audience that there was no way of truly knowing and that although some of his key indicators, most notably the measures of gross residential investment together with housing starts, were indicating that the current decline has nearly reached levels reminiscent of past bottoms, there is no certainty that the current decline will play out in typical fashion.

For example, Professor Case noted very clearly that housing starts essentially skipped the 2001 “dot-com” recession barely registering the general economic decline essentially resulting in an anomalous and prolonged building boom.

In a particularly interesting moment at the outset of the presentation, Professor Case briefly mentioned in passing that he had recently noticed some extra seasonality in the Boston S&P/Case-Shiller series that he presumably had not initially fully recognized.

Later during the Q&A section of the lecture I wasted no time in asking him to elaborate on his findings of the Boston index.

He stated that he had been looking at the index and noticed that, in recent years, the seasonal pattern appears very strong, stronger in fact that during the 90s period, and that the recent monthly price increases for Boston could simply be following the trend of increasing prices during the spring selling months then declining during the fall and winter.

I followed up by asking him if he anticipated Boston prices falling from now until February inevitably reaching a new low for the area for which he essentially smiled a bit and suggested that we will have to wait and see.

There were many other very interesting points covered during the lecture and Q&A but suffice it to say that if all home buyers were privy to this quality of information (i.e. housing is cyclical, housing growth over the long term is generally consistent with income growth, it’s important to consider how a home’s “real” value changes not simply “nominal”, etc. etc.) prior to planning for their home purchase I can only imagine that better choices could be made.

Making His Case – An Conversation with Professor Karl Case

Earlier in the week Karl Case, Professor of Economics at Wellesley College and co-creator of the Case-Shiller home price index, joined WBUR’s Deb Becker to discuss his outlook for housing particularly in light of the latest results of the S&P/Case-Shiller home price data.

All things being equal, Professor Case’s view could be described as mixed to notably optimistic with suggestions that the housing decline and its associated economic turmoil could bottom as soon as this year.

Needless to say, this form of sentiment coming from one of the country’s most respected economists and residential housing experts caused a bit of a stir within the comments of this blog and elsewhere (article1, article2, article3).

Fortunately, Professor Case is very gracious and was willing to elaborate on his sentiment in a response to several questions that I posed to him via email.

The following is his full response, in conversational tone (and with charts!), with my original questions listed at the end:

Why am I optimistic? First of all optimism is a relative term. I started writing about housing bubbles and their dangers a long time ago (New England Economic Review May 1986). Let there be no doubt, we have a big problem. Several housing bubbles have burst all at once; prices are indeed in free fall in many places; institutions are dead and dying and the losses are well up in the trillions. The Case-Shiller numbers are ugly. See table 1.

We are in uncharted waters. There is a significant chance that we are all wrong about how this will unwind. If nothing else, the history of markets teaches us humility. The headlines around our release last Tuesday implied that prices were in free fall everywhere and that this would never end. All I tried to point out was that not everything in the release was negative.

So what is positive?

While the big four (Florida, Arizona, Nevada and California) are down roughly 30% and falling, prices are simply not falling everywhere. Seven metro areas were up slightly May over April. My comments were made in Boston so I took it as an example. Certainly there is slight seasonality in the index, however it has been mild compared to the seasonality in the mix which affects medians. It could also be that the mix between auction properties and everything else changed but auction sales didn’t drop until June and these are the May numbers.

Boston looks quite similar to the way it looked during the last downturn. The Boston index is down 12% from peak which was in September 2005. Last time the bubble burst in Boston the index dropped 16% peak to trough and it took 43 months (October 88 through February 92). The first up-tick in ’92 (seasonal or not) signaled the end, but it bounced along the bottom for two more years. Certainly Boston has slowed from a peak rate of increase much earlier…But I have argued since the mid-80s that Boston was a bubble; it had to give back, and it has. What else is positive in Boston? Existing home sale have been up in every month since February, and the number of foreclosure auctions dropped in June. Realtytrac seems to have the best numbers. In addition, employment is up 23,000 in June statewide and 16,000 in Boston.

Coming along is the FHA bill as well as the last hunk of fiscal stimulus (small). Exports are up big time thanks to the weak dollar and GDP was up in the second quarter.

Prices are simply not out of line with income everywhere. If you plot house price income ratios by state, in a vast majority of cases they are flat. I will enclose a few.



The market is traditionally a quantity clearing market. When demand drops, sellers hold out. Prices are sticky and inventory rises. We have a ton of evidence about that. Since there is a positive rate of household formation, inventories fall and balance is ultimately restored. In every major downturn in the housing market since the early 70s the pattern of housing starts over time has signaled peaks and troughs. In every cycle, starts go over 2-2.5 million and then drop to under a million. In every case, starts have fallen by over 60% to below a million. And every time that we have hit a million, new production picks up. Some point to the fact that this expansion was very long and we simply overbuilt. That may be true. The housing expansion did ignore the very mild 2001/2 recession. But absorption basically kept pace with boomers buying multiple houses and foreigners buying on the weak dollar. Nonetheless it was a long huge expansion. Vacancies are up but inventories are not out of line with past recovery cycles.

I agree that the auction sales short circuit the sticky seller story, and some argue that we should drop them from the index. Nonsense. They are part of the market. The fact that in some states they are a huge proportion of sales (Arizona > 80) means that you have to think hard about what the term “market price” means. In fact, nationwide in June, auction sales were just over 17% of total existing and new sales nationwide.

Even in this environment optimistic home buyers are out there. Bob and I have surveyed homebuyers every few years starting in 1988. We get a remarkable return on a ten page questionnaires sent to 500 each in Orange County CA, Boston, San Francisco and Milwaukee. In 1988 over 90% of all buyers thought prices would rise over the next year (99% in San Francisco and 90% in Boston). In 2008 a majority of buyers in all cities still believe that house prices will rise this year!!! (65.3% San Francisco/64.5% Boston/75% Milwaukee/53.5% Orange County)

For me what is encouraging in the numbers that came out Tuesday was that most states don’t seem to be falling into the abyss. We have at least three stories: 1. simple glut in Florida, Arizona and Nevada. These will simply be written down. 2. A boom that was a bubble in California and to a lesser extent in the Northeast: California has been through this detoxification three times and it seems to survive every time. For many, it is unpleasant, but most who have equity left are back in the game soon.

If you believe the Flow of Funds data, during the period 2000 to 2005 we added $10 trillion to the stock of residential capital valued at replacement cost and land ($5 trillion each). Since 2005 we have added over a trillion more in capital, but we have given back about $1.7 trillion in land value. In addition, our 10 city composite is still 82% above its 2000 value. Is the glass half empty or half full? All I know is that it isn’t completely empty, and when glimmers of hope appear, we should acknowledge them.

The Following are my original questions:

In your interview with WBUR’s Deb Becker you indicated that the Boston housing market might be approaching a bottom but doesn’t the pattern we have seen this year in the Boston Case-Shiller index simply reflect the typical strong seasonality of our market? (i.e. prices increased sequentially from February to June-August for each of the last three years then declining strongly during the fall and winter months reaching new lows. See attached chart 1.)

Isn’t it also true that annual price appreciation has essentially been declining in the Boston area since early 2001 indicating a more fundamental decline is underway? (i.e. peak annual YOY appreciation occurred in March of 2001 and declined steadily until the first annual YOY depreciation occurred in April 2006 and prices have continued to slide to today. See attached chart 2.)

In your interview you seemed to indicate that there might be a turnaround for housing coming even as soon as this year but isn’t our economy, both locally and nationally, simply sliding into the next systemic shock which could materialize as either unusually high unemployment, high energy and commodity driven price inflation, an unmanageable unwind of Fannie and Freddie, widespread regional bank failures or all of the above?

I realize that it’s generally considered civil to be optimistic when it comes to discussing the plight of the housing market and the economy but isn’t there, rationally, two sides to each market with many participants that would benefit should home prices continue to decline dramatically?

Finally, it seems that, in past housing declines, the market “bottoms” setup slowly and bounced along at the lows for two to three years before resuming growth in-line with prospective wider economic growth. Given this fact, isn’t it reasonable for homebuyers to simply wait it out until there are some real signs of price stability? (i.e. what’s the rush?… who says you can’t time the bottom when the bottom is generally established during 2 to 3 full selling seasons.)