Significant Downward [Housing] Price Movements
That is one possibility that James Hamilton sees for the housing market. Prof. Hamilton looks at the Office of Federal Housing Enterprise Oversight housing price indexes. While prices are still rising in all but five states the rate of increase has considerably dropped off from the second quarter. Here is Prof. Hamilton’s final conclusion,
I continue to watch this with concern, because the magnitude of the previous run-up in real estate prices suggests that the size of ultimate price declines could be quite dramatic as well. If one takes a market fundamentals view of the last five years, the earlier price appreciation would be attributed to falling interest rates, growing population and income, and restricted housing supply. The first factor is presumably the most important, and, if population and income were constant, would suggest that now that interest rates have come back up, the previous increases in house prices would be expected to be reversed. The reality is not quite so stark, since continuing growth in population and income can also provide for some of the adjustment. Even so, I would not discount the possibility of significant downward price movements.
And what then would become of the billions in interest-only, no-down-payment loans currently outstanding, and the home equity loans that have financed much ongoing consumption spending? Ah, that’s the question of the hour, isn’t it?
Indeed that is the question. It seems pretty clear that the economy is going into a slow down. Whether it is a period of simply slower growth, zero growth (a “soft landing”) or a recession is the question.