US real house prices – the elusive recovery

  • US house prices reached an all-time high in October 2017
  • But real house prices are still 12% below their October 2005 peak
  • Subdued house price growth will affect housing – and household savings and investment

US house prices – specifically, the median price of existing homes – reached another all-time high in October 2017. The nominal price reached just above $250,000, compared with a pre-crisis peak of just under $230,000 in October 2005. Other measures tell a similar story: The Federal Housing Finance Agency (FHFA) index, which measures sales of the same house, peaked in August this year, with a national index of 251.9, up from a pre-crisis peak of 226.3 in April 2007; the S&P Case-Shiller national index, which also measures sales of the same house but with a somewhat narrower geographic sample, also peaked in August, with an index reading of 192.47, compared with a pre-crisis peak of 184.6 in February 2007. (In both cases, August is the latest data.) The rise since the pre-crisis peak varies somewhat, but, broadly speaking, it is between 4% and 11%. Not spectacular, given that it took 10-12 years, but at least headed in the right direction.

Except, this is all nominal. In real terms, deflated by the consumer price index, prices have done less well, despite subdued inflation. In 1982-84 dollars (the base for the US CPI), house prices peaked at $115,505 in October 2005. They fell 38% to $71,518 in July 2011, and have since recovered to $101,547, a 42% rise, by October 2017. But, crucially, this is still 12% below their pre-crisis peak. Using deflated FHFA or S&P Case-Shiller indices gives similar results, down 7.5% and 21% respectively relative to their pre-crisis peaks. Moreover, real house price growth has levelled off in recent months.

This is relevant for two reasons.

Back in 2010 or 2011, I wrote a report for Lombard Street Research clients where I noted that after each of the four major housing booms and busts since the early 1960s, it took longer and longer for house prices to recover to their pre-crisis peaks. Extrapolating how much longer it took each time meant that in the latest cycle, real house prices would only recover by November 2016. I took that to mean “never”.

Never is probably too strong a statement. But, we are now eleven months after that less than serious target date, and 12 years after the peak and US house prices are still well below their real all-time high, and reaching that is looking ever more elusive.

If real house price growth does remain subdued, it should have some long-term consequences for the housing market and for household behaviour.

Households buy houses for a number of reasons. But one important reason in western and in particular Anglo-Saxon societies has been the assumption that real house prices will in general move higher over the long term, albeit with temporary dips from time to time. If that assumption no longer looks as assured as it was, then the rationale for buying changes. This is even more the case given longer life spans and a increasingly mobile population, for whom the concept of staying at one employer or even in one place for very long is increasingly alien. Under those circumstances, flexibility of housing may be more valuable than (doubtful) financial returns, particularly if buying requires a more substantial up-front down payment (part of the new macroprudential regulatory framework, with banks needing to be more prudent in their lending). This is likely to lead to the current increase in renting – at the moment largely a decision forced by the unaffordability of buying a house for most young people – becoming the preferred lifestyle choice.

However, this has one very significant consequence: whereas payments towards a mortgage serve a dual purpose (the same payment is both a payment for consumption of housing and a form of savings), payments of rent serve only to pay for consumption of housing and have no savings element. Households will therefore need to set aside additional finance to meet their savings objectives, and this will directly reduce the amount of disposable income available for consumption.  That is likely to lead to weaker growth, especially in those economies (for example the US and the UK) where up until now the main engine of growth has been consumer spending.


Gabriel Stein 2017-11-22