Don’t be fooled by good news on housing

I notice lots of happy news in the US media about housing, most centred arounds reports of a rise in the S&P Case-Shiller 20-City Home Price Index. I’ve already expressed my views on this – you have to look not only at the home price index but also at delinquency rates; how many people are behind in their mortgage payments since a specific percentage of those “home owners” will eventually default and the properties will fall into repossession.

Curious interview with Robert Shiller (yes, that Robert Shiller who created the above named index) where he states “in real terms, housing is just about flat” and overall is suggests the market is “not going into a nationwide boom and not many places will show booms in the next few years”.

Following up on his comments regarding real rates of return, the chart above presents the inflation adjusted (i.e., real) S&P Case-Shiller 20-City Home Price Index (by means of the Fisher relationship between inflation and nominal rates). The index, although modestly increasing in nominal terms, has sharply declined – some 33% in fact – over the past five years when adjusted for inflation.

Striking contrast to the happy message the American media is widely reporting, isn’t it?

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