What Is Not Seen

Recently, I published a post on the U.K. housing market, where I argued that house prices are going to decline in the coming years. Later I got some questions regarding the U.S. housing market, if I believed a bottom could be seen any time soon. Compared to U.K. where house prices recently started to decline, the U.S. housing market has been declining since it peaked in 2005. As I mentioned in the post, housing cycles are especially long lasting, and for the U.S. economy I belive that house prices still have a far way to go until they bottom. From the Swedish language blog, finansblogg, there is a similar image for the U.S. housing market that I showed earlier for the U.K. housing market. The image show real house prices, both Case-Schiller home prices, and average existing home prices.

The Case-Schiller index measures house prices in 20 metropolitan regions across U.S. Looking at the chart, we see that prices today is still three standard deviations above the long term average.

The reason why I belive this downturn is much more severe than earlier ones, is analogous to what I briefly explained in the post about the U.K housing slump.

U.K house prices fell by 1.1% during April, the first year-on-year decline since 1996. Compared to the long term trend, real U.K. house prices is currently 25 % higher.

The last time U.K. house prices peaked was in Q2 1989. Back then, prices reached a level of 33% above the historical trend. Even if current levels are not as high relative to the long term trend as they where in the early 90’s, economic conditions are arguably worse this time.

Like U.S., the U.K. economy are now only starting to experience the effects of historical credit expansion, that has been fueling the housing sector since the late 90’s. This is primarily the result from lax monetary policy in the past, that has created economic dislocations, especially in the financial and manufactoring sector.

Housing cycles are often long lasting. After prices had peaked in 1989 it took 13 years until prices had reached the same level again. If we take into account that prices tend to overshoot the trend, we should prepare for quite a long lasting slowdown, this time.