Friday, February 25, 2011

Housing Malaise Points to Deflationary, Not Inflationary, Pressures

The papers continue to be full of talk of inflationary pressures. Oil prices have rocketed to nearly $120 a barrel, propelled by the unrest throughout the Middle East. Other commodity prices have stayed high as well.

Most strategists think interest rates will move higher as well, despite the fact that most bond yields have moved lower over the past few weeks.

However, housing prices continue to drift lower, despite massive efforts on the part of the federal government to stimulate housing demand. Nearly 1 out of 11 houses in the United States now stand vacant, and 1 out of 4 mortgages are underwater.

In other words, those looking for inflationary pressures have obviously not been looking at housing, despite the fact that housing accounts for nearly 40% of the typical American household budget.

I ran across this article a couple of days ago in the New York Times, and came away suitably concerned. Here's an excerpt:

Robert J. Shiller, the Yale economist who is the author of “Irrational Exuberance” and who helped develop the Standard & Poor’s/Case-Shiller Home Price Index, put himself in this last group. Mr. Shiller said in a conference call on Tuesday that he saw “a substantial risk” of the market falling another 15, 20 or even 25 percent.

The 20-city Case-Shiller composite is already off 31.2 percent from its peak, according to data released Tuesday. Average home prices in Atlanta, Cleveland, Las Vegas and Detroit are below the levels of 11 years ago. A drop the size that Mr. Shiller says he thinks could happen would put Chicago, Dallas, Charlotte and Minneapolis there, too. It would create a lost decade for housing in much of the country even before the effects of inflation.

Mr. Shiller said several political trends indicated a dreary future, including the uncertainty over the mortgage holding companies Fannie Mae and Freddie Mac and proposals to reduce the mortgage tax deduction.

Home Prices Slip in Most U.S. Cities, Case-Shiller Index Shows -

I hope Professor Shiller is wrong - the article goes on to cite several other industry experts who do not believe the outlook is as dire as he portrays - but I do think he raises some valid concerns.