Economic reporters could perhaps be excused for not noticing the housing bubble as it was expanding. After all, Alan Greenspan, who used to be the greatest central banker of all time, repeatedly assured audiences that there was no housing bubble. However, it is truly incredible that reporters could ignore its collapse, even as the bursting bubble throws the economy into a recession and has caused people like Federal Reserve Board Chair Ben Bernanke and Treasury Secretary Henry Paulson to become overwhelmed with fear. Reporters who did their job would have been highlighting the extraordinary drop in median house prices shown in the National Association of Realtors' (NAR) existing home sales index. Many reports did note that the index showed a modest year over year drop in nominal prices, something which has not happened since the index was first created in the late sixties. However, what is more striking is the rate of decline over the last half of 2007. The annual rate of decline in median house prices for the last quarter of 2007 compared with the third quarter was 21.8 percent. The price of the average home fell at a 17.0 percent annual rate. The NAR data shows an even sharper decline in house prices than the Case-Shiller index, which also showed double digit price declines for three months ending in November. (The December index will be released on Tuesday.) The price data are always somewhat erratic, but with two independent indexes now showing double-digit price declines, there can be little doubt that house prices are falling at a rapid pace. If this rate of decline persists, it will have an enormous impact on the economy. The 21.8 percent rate of decline shown for the median house price would imply a loss of more than $4 trillion in housing wealth over the course of a year. This is more than 50 times the size of the tax break for families being considered as part of a stimulus package by Congress. The sharp decline in house prices should have been front page news. Missing the bubble was an enormous failure by economic reporters. The failure to cover the dynamics of its collapse is an even more remarkable failure.
--Dean Baker
