Monday, May 7, 2012

Why U.S. House Prices Won't Recover

When will U.S. house prices recover? Likely never. But that's no reason not to buy.

The latest S&P / Case-Shiller numbers, reported last week, show that prices in 20 major markets declined 3.5% over the year through February. They're now back to 2002 levels. If we subtract for inflation, they're back to 1998 levels.
But consider: After subtracting for inflation, prices are also back to 1986 levels. And 1955 levels. And 1895 levels (see chart).
That's because the natural rate of price appreciation for houses is zero after inflation. Prices will eventually stop falling. They'll resume rising. But over the long term, they're unlikely to resume rising faster than inflation.

SmartMoney: Home Prices Aren't Coming Back

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Waiting for housing prices to rebound? Don't hold your breath... so says SmartMoney's Jack Hough who pulls up a chair on Mean Street and points out the truth in numbers. Photo: Getty Images.
That's why prospective buyers should stop focusing on the vague hope that house prices will jump from here and focus instead on the functional value houses provide for the money. In most markets, they provide enough of that to make buying a good deal.
To see why house prices and inflation are linked, consider that inflation is a general rise in the price of consumable goods and services. We measure it as a nation just as you might think: pollsters collect prices on thousands of items and statisticians turn those prices into an index, called the Consumer Price Index.
The inflation rate over the year through March was 2.6%. Behind that number is a lot of variation; dairy products got 6.3% more expensive, while utility gas service got 9.1% cheaper.

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