Introduction to the Housing Market Crisis
The national and 10-city Case-Shiller indexes have dropped four months, indicating a significant shift in the housing market. This decline is a clear sign that the market is experiencing a downturn. To understand the implications of this decline, it’s essential to examine the current state of the housing market and the factors contributing to this trend.
Understanding the Case-Shiller Indexes
The Case-Shiller indexes measure the sales prices of the same homes over time, factoring out major improvements. This approach provides a more accurate representation of the market than median or average prices, which do not account for variations in square footage, location, lot size, or amenities. However, it’s crucial to note that the Case-Shiller indexes are lagging indicators, meaning they reflect the market conditions of a few months prior.
Current Market Trends
The latest report, which includes sales data for April, May, and June, reveals a decline in the national and 10-city indexes. This decline is a significant indicator of the market’s current state. The percent change in the Case-Shiller National and 10-City indexes since January 2020 is 51.8% and 52.3%, respectively. In contrast, the Owners’ Equivalent Rent (OER) and CPI Rent have increased by 28.7% and 28.3%, respectively. The CPI has risen by 24.7% during the same period. These numbers demonstrate that home prices have become disconnected from the CPI, leading to concerns about affordability.
The Consequences of the Housing Market Crisis
Many Millennials and Zoomers are frustrated about being priced out of the housing market, as home prices have risen more than double the alleged CPI. The decline in the Case-Shiller indexes barely registers, with the National index down 1.16% from its peak and the 10-City index down 0.74%. This minimal decline is a cause for concern, as it may not accurately reflect the current market conditions. In declining markets, prices are often lower than the report indicates, while in rising markets, prices are higher than the report suggests.
The Role of the Federal Reserve
The current housing market crisis is, in part, a result of the Federal Reserve’s actions. By not considering home prices as inflation, the Fed has contributed to the disconnect between home prices and the CPI. The Fed’s preferred measure of inflation, the PCE, does not directly account for home prices, treating them as a capital expense rather than a consumer expense. This approach has led to the Fed ignoring obvious inflation in the past, including during the Great Recession and the Covid recession. The consequences of this oversight are now becoming apparent, and the Fed is faced with a difficult situation.
The Path Forward
To address the housing market crisis, mortgage rates need to decline, and home prices need to fall dramatically. This would make homes more affordable for potential buyers. However, achieving this balance is a challenging task, and the Fed is struggling to find a solution. The recent admission by Powell that the prior monetary framework was hugely flawed highlights the complexities of the situation. The Fed’s new monetary framework may provide some guidance, but its effectiveness remains to be seen.
Conclusion
The housing market crisis is a complex issue, driven by a combination of factors, including the Fed’s actions and the disconnect between home prices and the CPI. As the market continues to evolve, it’s essential to monitor the trends and adapt to the changing conditions. The decline in the Case-Shiller indexes is a significant indicator of the market’s current state, and it’s crucial to consider the implications of this trend. By understanding the underlying factors and the role of the Federal Reserve, we can better navigate the challenges of the housing market and work towards creating a more affordable and sustainable market for all.
