Who Says House Prices Well-Contained?
06/07 16:57
By Caroline Baum
quote.bloomberg.com
New York, June 7 (Bloomberg) -- The glass that is the U.S. economy is clearly more than half empty. The latest soundings on everything from manufacturing to employment to capital spending to productivity to corporate earnings have been lousy.
There is scant evidence of any improvement in the economy even in the face of 250 basis points of interest-rate stimulus.
In the spirit of allowing equal time for opposing points of view, this column will focus on that itsy-bitsy part of the glass that has some viable fluid in it. Housing is still booming -- in terms of real activity and prices.
Sales of new and used homes set an all-time record of 6,418,000 in March, which is unusual for a sector that usually precedes the economy's ebbs and flows. Even with the April decline in both series, ``sales are running at a record pace,'' says David Berson, chief economist at Fannie Mae.
Should April's depressed level, relative to the first-quarter pace, persist through the rest of the year, 2001 will still be a record year for new and existing home sales, Berson says.
Of course, the sale of a home doesn't enter into the GDP accounts. Gross domestic product is exactly what it says: a measure of the output of goods and services produced in the U.S., which can be measured in several ways (by output, spending, or the income generated from output).
What counts for GDP purposes is residential construction, or housing starts, which accounts for 4 percent of GDP.
Sales Beget Spending
What home sales do is beget economic activity (and new home sales encourage new construction by builders). Homeowners tend to refurbish their domiciles, turning this old house into this new starter-mansion. They furnish them with washing machines, refrigerators and furniture. They paint, landscape and garden. They buy barbecue grills so dad can satisfy his culinary instincts.
As it turns out, household spending on furniture and appliances contributes more to GDP -- and is definitely more stable -- than residential construction, according to Henry Willmore, senior economist at Barclays Capital Group.
Home sales, in other words, have long coattails.
Given the strength in housing demand and the limited supply of homes for sale, guess what's happening to prices? They are rising at the fastest pace since 1980, according to a broad gauge of home prices.
Prices Rising
The Office of Federal Housing Enterprise Oversight (OFHEO), which is one of the regulators of Fannie Mae and Freddie Mac, the nation's largest housing finance institutions, compiles a quarterly index of home prices. Its home price index (HPI) is a broad measure of single-family house prices, based on repeat sales or refinancings tracked by Fannie and Freddie's database going back 26 years.
If you're looking to track the trend in home prices, forget the monthly changes in the new or existing home sales reports. This is your man.
The average U.S. home price rose 8.9 percent in the fourth quarter of 2000 from the same quarter a year earlier, the fastest pace since the first quarter of 1980. In the first quarter, the rate of increase slowed slightly to 8.8 percent, OFHEO reported earlier this month.
The HPI bottomed in the fourth quarter of 1990, when home prices rose 0.2 percent year over year. Price increases were modest through 1997; then, like everything else, they took off with a vengeance, rising 5.4 percent in 1998, 6.3 percent in 1999, and 8.9 percent in 2000.
Follow the Leader
As it turns out, the HPI correlates well with the shelter component of the consumer price index, according to Barclays's Willmore.
``Over the last 25 years, the average change in the HPI was 5.7 percent annually, while shelter increased an average 5.6 percent,'' Willmore says. ``The HPI leads the shelter component of the CPI with about a year lag.''
Shelter accounts for 30 percent of the CPI and 39 percent of the core CPI, which excludes food and energy. It includes things like residential rents, owners equivalent rent (the imputed rental value of a home), hotels and motels, insurance, and fuel and utilities.
Shelter prices rose 3.5 percent in the year ended December. In the first four months of 2001, the annual rate of increase was 4.4 percent.
When one considers the big increase in home prices in the HPI ``on top of higher utilities costs, which will be added on by landlords, it gives you an idea of the risks'' to inflation from shelter, Willmore says. He expects to see shelter costs rising 5 percent or more by the end of this year.
Then There's Medical Care
OFHEO breaks out home prices by region, state and city. The top 20 cities for home-price appreciation in the year ended March 2001 included 13 in California. California, with Silicon Valley well-represented, is home to the top 11 of the top 20, with price increases of as much as 27 percent in the last year.
What's interesting is that even in the post-bubble first quarter of 2001, home prices were still rising in Santa Cruz (4.7 percent), Santa Rosa (2.9 percent) and San Jose (2.4 percent).
Housing isn't the only sector that has some pricing traction. ``Medical care is already there,'' Willmore says.
Medical care costs rose 4.2 percent last year and are rising at a 5.9 percent annualized pace in the first four months of the year.
``To paraphrase the Church Lady, how inconvenient,'' he says.
Statisticians like to remove food and energy from the CPI because of their volatility. They like to ex-out anything that smacks of a one-time event, like a tobacco-price increase, or reflects a faulty seasonal adjustment problem, like early introduction of the spring apparel line. (Note: The tendency to ignore flukes is restricted to price increases, not decreases.)
With energy prices persistently sticky, housing and medical care on a roll, there isn't much left in the CPI that qualifies as well-contained. |
