House Prices Drop Slightly

Getting hold of hard economic data right now is difficult. Worse: when we find some it is ambivalent. Today’s Case-Shiller Index report bucks that trend somewhat, home prices dropped 0.7% in October. That’s not ambivalent, it’s just bad.

The problem with housing is not just that it seems difficult to identify the bottom in prices, but that so many unknowns impinge on that calculation. The Case-Shiller Index measures resales of houses in 20 of the country’s top housing markets, so it gives us an excellent reading on the movement of values through time. After picking up a little earlier in the year we are now facing the likelihood that prices will continue to ebb for a few months more. My guess is well into the early summer of next year.

Why?

Because of all the reasons that undid the bubble to begin with plus the pressure of a “shadow” inventory hanging heavily in the background. This latter effect is the great unknown: no one really has a proper notion of its impact, yet we all know that there is such an impact. The shadow inventory consists of all the homes with mortgages in arrears, in foreclosure, or simply in the hands of owners who would dearly love to sell but cannot for a variety of reasons, negative equity being primary among them.

So the openly discussed inventory of unsold homes, which is still large by historic standards, but is down from the peak reached in the immediate aftermath of the crisis, is just the tip of a very large and depressing iceberg. Even if it never transmutes into actual activity to the extent that its shadow suggests, that inventory is choking off any solid recovery in housing. Couple this continued loss of wealth implied by lower home values with the poor income outlook into 2011 and 2012, and it is very hard to see a dramatic upturn in aggregate demand.

Without that we won’t get back to our historic growth pattern any time soon. And the longer we remain below that long termtrend, the more prone we are to reversals and dissatisfaction all round.

Don’t forget that real estate played a disproportionate role in generating jobs over the last decade. Construction is just not going to be a big factor in the near to medium term. Which leaves the great question unanswered: where will the jobs come from?

Who knows?

And that is why we all are stumbling with our forecasts. If we subtract construction from the equation, the US economy has a weak record for job creation for a very long time. So we keep coming back to the same solutions. Devalue the dollar to get jobs from export trade; and boost domestic demand as best we can through reflationary policy actions. Looking beyond that old bag of tricks requires an imagination singularly lacking in our policy and business leadership at the moment.

Meanwhile today’s home price report suggests we are still stuck in a low gear. Unfortunately.