The economic trends of the housing market over the last decade have been all over the place. Home prices were soaring until the year 2005, when they spiraled down at a fast pace. Home prices started to increase again in 2012. But, how strong is the housing recovery and what will home prices look like over the next decade?
In April, sentiment among homebuilders decreased 42, from the previous month’s 44, for the third consecutive month, according to the National Association of Homebuilders/Wells Fargo Housing Market Index.
According to a different report that reflects the number of housing starts and building permits issued each month, the number of housing starts increased to a 1.04 million annual rate in March. In February, it was at a 968,000 annual rate, which reflects the fastest pace since June 2008. There was an increase in construction for multifamily units, while construction for single-family homes decreased. The number of building permits issued in March also decreased 3.9 percent from the previous month.
On April 10, Michael E. Feroli, chief United States economist at J.P. Morgan Chase said, “That residential investment – including homebuilding, repairs, renovation and brokers fees – would rise enough this year to add 0.5 percent to GDP growth.”
In the last quarter of 2012, the Standard & Poor’s Case–Shiller 20-city Index reflected that home prices had a sharp increase and increased at the fastest rate since June 2006. According to Robert Shiller, who is also a Yale economist, historical data confirms that these trends are not meaningful over the long-term, even if the trends continue for a while.
“One-year home price increases, after correcting for inflation, have had almost no statistical relationship to increases 10 years down the road. Thus, the upturn last year is irrelevant to long-run forecasting. Booms are typically followed by busts, usually in far less than 10 years. In a decade, an entire housing boom, if there is one in inflation-corrected terms, is likely to have been reversed and completely washed away,” said Shiller.
He advises prospective homebuyers to emphasize on fundamental factors such as inflation and construction costs to assess long-term pricing trends. In addition, the illusion that home prices are increasing is created by inflation. However, the cost of housing is typically driven down by increasing productivity in the construction industry.
In addition to creating the 20-city Index, Shiller is the author of a three-part series in Sunday Business. This article was part of his first column. In his second column, he discusses real estate bubbles and how years of declining interest rates affect housing and other markets. In his third column, he discusses cultural and demographic trends, and how stimulative market influences of an increasing population along with potential pricing constraints could happen in the future.