House Prices and Consumers

We have two pieces of news today that need to be mentioned: the Case Schiller home price index and the Conference Board’s index of consumer sentiment.

The Case Schiller index shows that home prices are rising very slightly from the lows reached earlier this year. The increase was 1.6% in July compared with June. This is the third straight month the index has risen, so applying my ‘we need several months data before there’s a trend’ rule I think we can now argue safely that the value of housing has stabilized. At least for now. The only caution I need to raise with respect to the Case Schiller index is that it concentrates only on the 20 largest metropolitan areas of the country and so is not as all encompassing as the data the Federal Housing Finance Authority publishes. But since the latest FHFA report also showed prices firming, I think it is safe to view the firming trend as a solid broad based phenomenon.

Good.

So what?

Well the fact that home prices have firmed will allow us to stop being concerned about further erosion of household wealth – declining house values has been the biggest reason most families have lost wealth throughout the recession. So with the decline over people can at least feel that they are now looking at the worst they will have to deal with. Naturally there will still be pockets of further weakening, with Florida and Nevada the most likely areas to see more lost value.

To the extent that home prices declining contributed to the downturn, we can safely cross off a milestone towards recovery.

But: this will have little immediate effect on the economy. There are bigger issues looming out there that have pushed home prices to the background. Unemployment being the most evident.

I still expect the negative impact of unemployment to prevent a vibrant or even sustained recovery. The stabilization of house prices might, and I stress the uncertainty around this statement, it might result in some consumers spending more and thus it could contribute to building momentum behind growth.

Given the way in which the financial media gets itself into a lather over home prices you’d think it was a key driver of our immediate future. It is not.

Why?

Because even though the Case Schiller index suggests that things are getting ever so slightly better consumers seem either not to have noticed, or not to care.

The Conference Board survey of consumer confidence shows a drop in September, from 54.5 in August to 53.1. The consensus amongst the ‘experts’ was that confidence would continue to build, so the slight decline is not good news at all.

I continue to be amazed at the extraordinarily short term nature of the ‘experts’ who clutter up the airwaves and print media. They are all touting the recession’s end and so are almost all now writing in steady improvements into their expectations of the data.

I just cannot agree with them. This will stay a bumpy ride.

The economy is not a bunch of data points, it is a mass of people. So psychology plays an enormous part in the way an economy works. I realize that such an opinion sets me outside the club of textbook economics, but so what? The club just failed in practically every way it could.

An example of the impact of psychology is the shadow cast by unemployment and the potential for wage freezes, cuts and so on. People are still fearful. The economists may say – as I do – that the recession is over, but that statement has little depth or meaning to most families. They are waiting for jobs to become abundant and for wages to rise. That’s when they’ll know we have recovered.

So it is entirely to be expected that people remain skeptical of the short term prospect for the economy. Hence the Consumer Board result.

And getting back to housing: falling prices are only part of the equation. Most families feel the loss of wealth only in a notional or abstract sense. The value was never real. They bought a home years ago, inflation pumped the paper value of the house up so the family felt better off. Perhaps they saved less on the basis of that paper wealth – they imagined that they could use the house as a source of cash if need be. This induced a willingness to spend more. Savings went down and spending went up. That pretty mush encapsulates the last two or three decades. The psychology of bubbles being what it is, this good feeling gave away to excess, then to frenzy, and then to collapse. So all those good feelings are now being washed away as the effects of inflation are undone.

Good. Because a home should never, ever, be an investment. It should be a home. Period. The notion that a home is a source of wealth is a pernicious fiction propagated by realtors and those who imagine a future America composed entirely of solid middle class property owners.

The reality is that making money from a house is luck. It doesn’t turn you into one of the landed gentry any more than an increase in your 401k plan turns you into a capitalist.

If you want to save money, then save money. Invest. Take some explicit risk. Buy stocks or bonds. Borrow and expand your house – that adds value – but don’t simply gamble on inflation. One of America’s great failures over the last three decades has been it’s unwillingness to save and therefore to invest in building productive capacity. Instead it indulged in a binge of real estate. The resultant inflation nearly destroyed the world’s economy. Homes do not add to future productivity. Factories and new technologies do. America’s obsession with real estate cost it decades of investment in building its future wealth. Hopefully that’s now done with. Though history tells me not to be optimistic.

But Americans are, indeed, saving more. Which is why those consumer confidence numbers are important to watch. As long as insecurity stalks the public stage the way it still does we can expect to see weaker spending and stronger saving.

That’s why today’s reports are so interesting: housing may be stabilizing, but so what? Consumers are still worried that their employer could fire them or cut their wages. With good reason. The job figures are still bad. With the back to school selling season past us, this consumer funk is beginning to undermine the prospect for a strong holiday selling season, and with the end of the year fast approaching, this is something we now have to start watching.

There’s an awful lot riding on the next few months, and housing is much less a factor than it used to be.