There’s been a recent spate of articles describing how a minor uptick in the Case-Shiller housing price index means that the recession is nearing a close. Leaving aside some outstanding issues such as the looming ARM recasts (which might roll on for five years), it’s remarkable that a slight uptick is being heralded as a ‘green shoot.’ But there’s a very disturbing assumption whether or not one thinks housing prices will stop sinking.
We are assuming that housing prices should increase back to where they were ~2005 – 2006. Why would that be a good thing?
As I noted a while ago, houses cost far more relative to income than they have throughout most of the last four decades or so. What that means is that people are paying far more for housing–or, looked at another way, too much for housing. That means there’s a lot of income that could be used for other purposes, ranging from private consumption (buying cool stuff) to public investment (taxing and doing government stuff). Instead, we’re sinking that compensation for labor into housing.
To a certain extent, that might represent an increase in housing quality, but does anyone really think that housing quality increased nationally by two thirds from 2000 to 2006? (The median price rose from ~$150,000 to ~$250,000 during that period). This was driven by two things. First, housing prices were bid up due to rising income inequality–houses cost a lot because some people can pay that much. Second, everyone was given lots of funny money credit: if you were a biped not on life support, you got a loan. In other words, this was a classic bubble. And there’s little evidence that the bursting of the bubble has overshot its mark–if anything, some more decreases might be on the horizon.
If we want housing prices to increase, we need to raise wages and incomes. That’s what we should be worrying about.