Why Home Prices Change (or Don’t)

WHAT prices will today’s home buyers get if they sell a decade from now?

Most people live in their home for many years. They don’t need to view it as an investment at all, but if they do, they surely need a long forecasting horizon.

The problem is that modern economics has a poor understanding of past movements in home prices. And that makes the task of predicting the state of the market in 2023 challenging, at the very least. Still, we can learn something by analyzing the factors that affect home prices in general.

There has been some good news lately: home prices have risen over the last year, and with those gains there has been a renewed sense of optimism. But do these price increases mean that homes are now good investments for the long haul?

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Debt-Friendly Stimulus

NEW HAVEN – With much of the global economy apparently trapped in a long and painful austerity-induced slump, it is time to admit that the trap is entirely of our own making. We have constructed it from unfortunate habits of thought about how to handle spiraling public debt.

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Yes, We’re Confident, but Who Knows Why

THE recovery in housing, the stock market and the overall economy has finally gained sustainable momentum — or so it is said.

That opinion seems to be based on several salient facts. Unemployment has been declining, from 10.0 percent in October 2009 to 7.7 percent last month. More spectacularly, the stock market has more than doubled since 2009 and has been especially strong for the last six months, with the Dow Jones industrial average reaching record closing highs last week and the S.& P. 500 flirting with superlatives, too.

And the housing market, seasonally adjusted, has been rising. The S.& P./Case-Shiller 20-city home price index gained 7 percent in 2012. 

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Housing Market's Future Still Has Many Clouds

WE'RE beginning to hear noises that we've reached a major turning point in the housing market - and that, with interest rates so low, this is a rare opportunity to buy. But are such observations on target? It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don't clearly suggest any particular path for prices, either up or down.

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A Metaphor for Obama

NEW HAVEN – As US President Barack Obama begins his second term, he needs a simple way to express his vision and policies for the economy – a metaphor around which support for his policies might crystallize, thereby boosting his administration’s political effectiveness. So, what makes a successful metaphor work?

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Wealth Effects Revisited 1975-2012

By Karl E. Case, John M. Quigley and Robert J. Shiller

In our earlier version of this paper we found that households increase their spending when house prices rise, but we found no significant decrease in consumption when house prices fall. The results presented here with the extended data now show that declines in house prices stimulate large and significant decreases in household spending.

The elasticities implied by this work are large. An increase in real housing wealth comparable to the rise between 2001 and 2005 would, over the four years, push up household spending by a total of about 4.3%. A decrease in real housing wealth comparable to the crash which took place between 2005 and 2009 would lead to a drop of about 3.5%.

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Please Don’t Mess With the Charitable Deduction

WHATEVER else we do about the tax code, we need to save the charitable deduction, which has done so much good in our country and springs directly from some of our deepest values.

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