David Leonhardt uses his column to point out that house prices are declining far more than the standard indices show. He misses my two favorite reasons. First, sellers often throw in many extras to make a sale now (e.g. help on closing costs, paying for repairs, paying condo fees for a year etc.). Sellers had no reason to make such concessions a year ago. These concessions will not appear in the indices which are based only on sales price. The other big problem is that the OFHEO House Price Index (HPI) only includes mortgages that are small enough to qualify for the Fannie Mae and Freddie Mac mortgage pools. These are capped at around $360,000, which is a 90 percent mortgage on a $400,000 home. In some of the most overheated markets, this cap puts you below the median home price. That means that much of the action in places like Boston, New York, Washington, and San Francisco will be completely missed by the HPI. It is likely that the price run-up was larger in the higher end homes and the current decline is larger also. THe HPI will miss both. (It is also worth noting that the HPI includes assessments for refinanced homes. The index based only on sales shows less of a year over year increase.) Following the WSJ yesterday, the NYT also has a good piece on the rapid rise in delinquencies in the sub-prime market. The growth in this market was a serious regulatory failure, as many moderate income people are going to be forced to give up homes on which they cannot afford to make payments -- great way to help people enter the middle class. (Actually, he does a good job covering some of these issues in an accompanying note.)
--Dean Baker
