Housing Prices Rebound

October 16, 2013

House price data indicate that the painful readjustment process is complete and it is time for the Federal Reserve to stop manipulating prices, says Alex J. Pollock, a resident fellow at the American Enterprise Institute.

  • More than seven years after the bubble peak in U.S. house prices, and four years after suffering the 2007-2009 price collapse, American house prices are now recovering and indeed rising rapidly.
  • The average house price went up over 12 percent from July 2012 to July 2013, according to the S&P/Case-Shiller house price index.

At present, the Fed is still keeping short-term interest rates near zero and manipulating long-term mortgage rates down through massive and unprecedented purchases of mortgage-backed securities for their own balance sheet -- again to support house prices and again hoping for a wealth effect to offset the continuing drag of the shriveling of the previous bubble. Should the Fed continue to try to manipulate house prices higher from this point, as it did in 2001, or not? To answer this, let us put house prices and inflation in long-term context.

  • From 1953 to 2013 there is obviously a very close correlation between general inflation and nominal house prices, and real house prices on average rise little if at all over the long term.
  • The housing bubble was a remarkable anomaly from the historical pattern, but note well that the housing shrivel took prices right back to the long-term inflation line by 2012.
  • At the moment, however, they are headed back north of that line, with lots of financial inducement from the Fed.

The house price adjustment from the bubble is already complete or more than complete. The Fed should stop trying to stoke house prices further and turn off its unprecedented allocation of central bank credit to mortgages.

Source: Alex J. Pollock, "House Prices: Is the Fed Making the Same Mistake Again?" The American, October 9, 2013.

 

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