Americans who have withdrawn from the real estate market while waiting for prices to drop were rewarded again in 2011, as the Case-Shiller home price index decreased between 1.1 percent and 1.2 percent across the index's 10- and 20-City Composites. House prices have now been falling for half a decade.
Note how Standard & Poor's report [pdf] uses pro-inflationary language to describe the decline in prices: "Miami saw no change in annual returns in October; while Atlanta, Detroit, Las Vegas, Los Angeles and Minneapolis saw their annual rates worsen," S&P writes [italics added].
Only Detroit, MI and Washington, DC posted increases in house prices this year, as seen in the chart to the right by Bill McBride of the Calculated Risk blog, which I recommend today and all days. I think the headline "House Prices fall to new post-bubble lows in October" leads the witness, however: Why should the 2006 bubble be a benchmark at all? Is there some reason to believe major-market prices, which were high relative to average annual salary in 2002 and 1999 and even 1991, were not hyperinflated in the last decade?
As for Detroit and the District of Columbia, this Detroit Free Press story notes that Motown's annual gains occurred mostly in the first three quarters. The city's house prices began dropping again in October. Detroit real estate shed more than 45 percent of its putative value from the peak through 2010. Given the widely shared belief that politicians can manage economic outcomes, this year's turnaround is good news for Gov. Rick Snyder, who took office at the beginning of the year and obviously saved the Motor State's economy by nixing its film production tax credit.
President Obama's economic mastery is even more evident in Washington, DC, where house prices have been climbing ever since he took office.
Of course, we know that inflation of real estate prices is neither good news nor bad. The price of a house is one factor relative to others. I relate it to average annual salary, which has not kept pace with the inflation of home prices since the mid-1980s. From the early 1960s through the mid-1980s, median home price ranged from 2.8 times to 3.5 times higher than median household income. Since 1985, house prices have grown by a factor of almost four [pdf] while income [xls] has slightly more than doubled. As of 2009, which was supposedly the trough of the recession, median house prices were still 4.5 times higher than median household income.
How have people been able to afford costlier houses without a matching increase in wherewithal? Through government-subsidized debt. Unfortunately, to maintain that system you'd need a subsidy so powerful that the borrower would not have to pay back the debt at all. So far nobody's been able to build one of those, though the Obama Administration has spent a lot of your money trying.
In the reality of the marketplace, it's becoming harder for the Fed, HUD, the Treasury Department and the National Association of Realtors to pretend the 25-year real estate inflation was anything but a $15 trillion rip-off. Americans are reducing personal debt and avoiding buying houses that were, and remain, more expensive than they're worth. They're right to do so, as today's news demonstrates. If you're looking for a return to equilibrium, the continuing deflation is necessary. We're also fortunate that government efforts to head that off the correction have for the most part failed. But it will take more than five measly years to reach the bottom of a pile of garbage this deep.