“Bernanke hints at thinking on housing,” says a curious headline in the Financial Times. We wondered why, after all this time, Bernanke would begin to cogitate about housing – or how the FT got wind of it.
Then, reading along, we discovered that the United States Federal Reserve chief had expressed himself on the subject in that great bastion of unremitting thinking – the US Congress. Speaking in cathedra, so to speak, he seems to have given things a little soupçon of actual thought himself. And what he seems to have thought is what we’ve been thinking for many months – that the housing slump may be a bigger problem than people think. When house prices go down, so goes the received wisdom – the “wealth effect” slips into reverse. People realise that they aren’t as wealthy as they used to be. So, they stop spending so much money.
But Ben Bernanke seems to have realised that there is more going on than that. Not only do people begin to think of themselves as poorer, but their ability to spend begins to decrease, as well. Especially at the low end of the income scale, the lumps depend heavily on credit.
When property values sink, so does the easy credit. And when interest rates go up, it’s harder and harder for the subprime borrowers, who were propping up a large part of the real estate market, to make their mortgage payments. These defaults will have a very interesting effect on the economy as a whole…
It’s not as if the US has never had a housing slump before. The New York TIMES reports that the average house price fell 24% between ’29 and ’33. Since then, there have been several local property crack-ups in America, but not a real nationwide bust. In the early ’80s, a collapse of the oil price hit some parts of the country hard. House prices in Houston fell 22%, for instance. In Lafayette, Louisiana, they went down 40%. Then, in the ’90s, recession and military spending cuts had an effect on both coasts. In the LA/Long Beach area, houses went down 19%. In Hartford, Connecticut, they fell 17%.
And now, the National Association of REALTORS tells us that median house prices across the country are down 4% since the housing market peaked out in October ’05. In certain places, the damage has been much greater. In the Reno, Nevada area, they’re down 8.8%. Around New Orleans, they’re off 11%. And in Florida, around Sarasota and Venice, prices have dropped 12.4%, according to the NAR.
All of which tells us that the dollar IS going up – against housing. How much? Will you be able to buy a lot more house for your dollars in 2010?
We don’t know; but our guess is that you’ll get only a bit more in most places…and maybe a lot more only in a few. Compared to Europe, property in the United States still seems reasonable. In many cases very reasonable.
But we wouldn’t be at all surprised to find it is even more reasonable in the future – especially to foreigners interested in buying a home in the states.
Markets and Money