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Dow Jones 23 October 2007
It's all about real home prices.
Until the decline in home prices is halted, the battered housing market won't be able to recover nor will the economy be able to return to sustainable trend-like growth. And home prices won't recover until housing becomes more affordable - and that will require a prolonged decline in mortgage rates.
That's the conclusion that Lakshman Achuthan, managing director at the Economic Cycle Research Institute in New York, draws from the recent behavior of ECRI's U.S. Leading Home Price Index. "We expect this price trend to continue on a downward swing," he said. "This will continue until the Federal Open Market Committee can drive mortgage rates lower and boost housing affordability." Home prices are currently playing two important economic indicator roles:
-They reflect the health of the residential real estate sector itself. Rising real home prices signal a healthy, thriving real estate market.
-An increase in home prices bolsters household wealth since home equity represents the largest portion of household wealth. It still accounted for more than 36% of net worth at the end of June, down from 37% in March. An uptrend in home prices is desirable as it increases the wealth effect and consumers' ability to maintain spending - a key element of economic growth.
But nominal home prices have been on an accelerating downtrend in recent months. Nominal existing median home prices were down 2.4% for the month in August and down 0.3% from a year earlier, and new median home prices were down 8.4% month-to-month, and 7.5% year-to-year. September data are due Wednesday and Thursday respectively.
ECRI combines new and existing home prices (there are roughly seven times as many existing home sales as new home sales) and deflates the result to get a composite measure of real median home prices.
The August reading for that composite measure hit a three year low and the September reading of ECRI's U.S. leading home price index pointed to continued declines. Moreover, the declines in real home prices occurred in all four regions of the country - Northeast, Midwest, South and West.
An upturn in real median home prices is seen as a precondition for a resumption of a sustained overall growth rate. That is still a development that is a hope, not yet a reality. Higher home prices will reflect stronger demand for housing which would signal a turnaround in one of the weakest sectors of the economy.
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