A major contributor to the Great Recession of 2008-2009 was the decline in home prices.
For the average household, the equity in their home is their largest asset, comprising a significant portion of their wealth. Wealth dropped an unprecedented $17.5 trillion over the seven quarters between mid-2007 and early 2009.
We are beginning to see some positive news in the housing sector, boosting the fragile recovery that is under way. Existing national home sales rose 12.3 percent in December, and November data were revised up, always a good sign.
Here in Colorado Springs, sales rose 9.9 percent in December, while condo/townhome sales were up 22 percent, according to the Pikes Peak Association of Realtors. The average single-family sales price has risen 6 percent last year, suggesting that we may be beginning to recover some of that lost equity. Condos and town homes, which comprise about 13 percent of sales, didn’t fare quite as well, with prices down 3 percent.
Wealth is an important determinant of the consumer’s willingness to spend, second only to income. When wealth declines, savings usually increases and consumption falls. This leads to a viscous circle of job losses, another drop in income, another drop in consumption, more job losses, etc. So the improving housing market suggests consumers will continue to spend a bit more freely than a year ago, leading to job growth and rising incomes.
There are numerous ways of reporting housing sales and they sometimes produce conflicting information. In a given month, one report may show the home prices rose and another conclude that they fell.
The figure that gets the most attention — and about the only one available for Colorado Springs — comes from information provided by Realtors. However, there are problems with the Board of Realtors data, since they only cover the houses that sell. The average price can increase even though every home price in the data base fell.
How can that be? It’s because the average price is heavily influenced by the type of home that sells. Suppose, for simplicity’s sake, that the Colorado Springs market were comprised of five homes. In Period 1, all fives homes are sold. In Period 2, only three of the houses sell.
Each house sells for less in the second period, but both the average and median prices increase. That’s because more expensive homes are sold in the second period. The same thing can happen in the opposite direction if expensive homes sell in Period 1 and moderately prices homes in Period 2.
The fact that many homes that went onto the market during the housing collapse were less expensive and sold to first-time buyers using unusual types of mortgages helps account for the huge decline in home prices over the last few years.
These distressed home sales have accounted for a third or more of monthly home sales on the national level and there is no reason to think the situation was any different here in Colorado Springs.
Better data come from the Office of Federal Housing Enterprise Oversight, since it includes only homes that have sold at least twice. Fortunately, Colorado Springs is large enough to be included in this data base, which shows that home prices rose .06 percent in the third quarter of 2010, after falling for 11 consecutive quarters. The shortcoming of this data base is that it doesn’t include any home sale above $720,750. The S&P/Case Shiller Index includes the larger homes missed by OFHEO but is only available for Denver and the entire state.
Still, whichever data base we look at, it looks like the housing market is stabilizing. That’s good news for the economic recovery.
Adams, a Colorado Springs resident and longtime Colorado economist, is a senior partner at Summit Economics. She can be reached at firstname.lastname@example.org.