More mixed messages

from Peter Radford

Tuesday’s report from Case-Shiller suggests the US housing market is recovering. Finally. The latest figures are for June and show a second straight month of price gain. Clearly home prices have hit bottom and are bouncing back at least a bit. That ought to bolster the economy later in the year as households breath a sigh of relief that their major asset is no longer fading but is strengthening. Even if only a little.

The June gain, at 2.3%, was strong enough to push prices into their first year-on-year gain for two years. Even though that annual gain of 0.5% was low, it marks a significant turning point in the market. Better yet: every one of the twenty major cities covered by the survey registered gains with, as we would expect, some of the most depressed showing the most rapid price increases. Detroit, for instance, saw prices rise by 6%, whilst Minneapolis saw a rise of nearly 5%. The good news is that the gains were so widespread. This is the first time for a while that prices rose consistently across the entire nation. Couple this with the results of other surveys – CoreLogic’s data has the year-on-year gain at a more robust 2.5% – and the upbeat tone in new home construction, and it is obvious that real estate, so long a drag on the economy, has found a bottom and is crawling out of the hole.

Good news about house prices (meta)

from Merijn Knibbe

1. As you might have noticed, there soon will be a World Economics Association internet conference on “The political economy of economic metrics” (see the the most recent newsletter, p. 11).
2. And some good news about house prices metrics. Mainly in the wake of the crisis, organisations like the BIS (Bank of International Settlements), the IMF, the OECD and Eurostat, not to mention Central Banks, are trying to improve house price statistics. Data can be found here. Eurostat has taken the lead, by publishing a manual (working document): how to measure house prices. Looking at, dissecting and analysing house prices led the statistical specialists to propose:

– to include house prices in the consumer price index (and therewith in our estimates of inflation!). This would have shown much higher inflation in Spain and Ireland in 2003-2007. And much lower inflation and (surely in Ireland) quite some deflation in the subsequent period… Time for a change?
– to make separate estimations of land prices on one hand and the prices of the dwelling, excluding the land below it, on the other hand, this also to enhance our measurement and understanding of bubbles. By implication, this would shatter the present capital/labour production functions of mainstream economic theory.

Should we leave this to the BIS/IMF/OESO/Eurostat? Conference articles dissecting this manual, discussing the concept, definition and measurement of house prices against the background of economic theory and analysis, are welcome, just like suggestions for improvements of the manual. It might for instance be interesting to discuss what a houseland price boom and busts enabled by Ponzi-financing means for the IS/LM model and our concept of productive investments… More information about the conference will follow soon.