Economist sees stability ahead for home prices
It's not the majority view out there, at least among the professional housing experts who are now getting all the ink and airtime and certainly not among readers of this blog.
But where some see signs of further trouble with home prices, Harvard economist Edward Glaeser, in a recent Times blog post, predicts a period of relative stability ahead.
The recent Case-Shiller numbers, which showed small price declines in several metro markets, including Boston, has triggered all sorts of handwringing.
As noted in this blog, Karl Case, the co-founder of the index, is not ruling out another significant drop in home prices, even as he argues somewhat tepidly the market may have hit bottom.
But Glaeser believes the housing market may repeat the pattern set after the downturn of the early 1990s, which ushered in several years in which prices bumped around a little but essentially stayed flat.
It's certainly an intriguing theory and one worth looking at.
For starters, the idea we are going to see a big rebound in prices is highly unrealistic, Glaeser contends, arguing it may take years - even decades - to get back to boom time levels.
And he also throws in a line that should warm the hearts of some of the more prolific contributors to this blog.
"Americans appropriately cheer when computers and cars get cheaper. We should also see the upside in cheaper homes. Indeed, we should hope that technological improvements in the building industry are passed along to consumers in the form of lower prices."
It's a point well taken.
As the centerpiece of his argument, Glaeser notes in the six years following April 1991, after home values hit bottom, prices stayed relatively flat. While there was a slight uptick followed by a slight trending downward, home prices never strayed more than 2.5 percent from the levels set in the spring of 1991.
In fact, home prices did not begin to rise significantly again until 1997.
It's an interesting argument. Yet one major flaw is that the nature of the economic crisis we are just starting to emerge from differs greatly from the contraction that followed the 1980s boom.
A flood of easy credit and incredibly lax lending standards helped drive all sorts of foolish behavior in the housing market and the business world in general this time around. We barely missed out on another Great Depression and the financial system - and lending on all fronts - has yet to fully recover.
At the least, it has been a much more severe downturn than what we saw in the early 1990s, though here in New England, due to the collapse of a couple major banks, that earlier recession felt more like a mini-Depression.
A couple years ago, before the events of September 2008, the idea that we might see a return of a 1990s-style flat housing market would have made a lot of sense to me.
But given the grave economic challenges still out there, it's less of a sure bet right now.
