Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Average house prices may fall 15% over the next four years
The Federal Reserve, Congress, and the Obama Administration have been engaging in an expensive attempt to keep house prices from falling along their trend line. They have spent hundreds of billions of dollars subsidizing first time home buyers, buying mortgage-backed securities, subsidizing mortgage buyers, and in other measures.
Yet, despite these subsidies, house prices have been falling rapidly for the past six months according to the S&P/Case-Shiller Composite-10 Index, and the trend downward looks pretty steady, as shown in the graph below:
The following graph shows the long-term trend line. The red line shows the actual house prices, adjusted for inflation (using the CPI). The black line is my projection of where real house prices will go over the next four years:
The downward trend of the past six months appears to be following the slope of the falling house prices just before the federal government and Federal Reserve began their interventions. The black line projects what will happen if the same trend continues. The result would be a 27% fall in real house prices over the next four years. In order to calculate the expected amount that actual house prices would fall, inflation must be subtracted. If inflation averages 3% per year for the next four years, the average fall in house prices would be about 15%.
It may soon become clear that the Federal Reserve and the federal government wasted hundreds of billions of dollars simply to delay the inevitable fall in house prices. Economic historians may compare their policies to the pervasive price subsidies that eventually bankrupted the Soviet government.
Journal of Economic Literature:
Atlantic Economic Journal: