The NYT quotes economist Karl Case as saying that we have no historical basis for analyzing a situation of falling house prices. In fact, we do. Nationwide house prices have historically tracked the overall rate of inflation. House prices hugely outpaced inflation in the decade from 1996 to 2006. To get back to their trend level, house prices have to fall by about 15 percent. Given the record nationwide vacancy rate, it seems virtually certain that house prices will resume their decline next year. The biggest question is whether house prices overshoot on the downside, falling below their trend level. It is also worth noting that in the Case-Shiller city indexes the bottom third of the housing market showed the greatest rate increase in most cities. In some cases, the differences between the top and bottom tiers were striking. For example, in San Francisco prices for homes in the bottom tier increased at a 29.8 percent annual rate over the last three months, while prices for homes in the top tier increased at just a 7.1 percent rate. In Minneapolis, the annual rate of price increase for homes in the bottom tier was 57.5 percent compared with 9.5 percent for homes in the top tier. This divergence is exactly what would be expected if housing demand was being driven by the first-time buyers tax credit. The $8,000 is a much larger share of the price of low-priced house than of a high-priced house, therefore it would be predicted that it would have the largest impact on prices of homes at the lower end of the market.
--Dean Baker
