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Wednesday, January 03, 2007

An observation on housing prices

The housing bubble didn't really hit us here in Texas. My quarter acre of paradise has been appreciating at around 3% per year over the past half decade. It was amazing to see the run up in prices on both coasts and a bit befuddling as well. Why exactly would housing prices increase so much, so quickly?

Not being a real-estate economist, I don't have the answer to that question, although I am sure some people are working on it. However, now people seem to be scared that the housing market is "cooling down" or that house prices are falling. There seems to be no clearer understanding for why prices are falling than why they were rising for the past three or four years.

Then I come across the Comerica Bank Texas Brief (available here) which contains the following trends of Texas and U.S. housing prices:

We don't need Ph.D. level statistics to interpret these trends. The Texas housing and U.S. housing prices are converging. In other words, perhaps the buildup of prices in the rest of the country was unwarranted and the market is adjusting back to where Texas - one of the biggest real-estate markets in the world - suggests the value of housing is.

Those who bought high with hopes of selling higher may be disappointed. If Texas prices were falling with U.S. prices, I might buy into the idea that there is some fundamental problem at the macro level. However, if [the growth rate of] Texas and U.S. house prices are converging, with Texas prices on the up-swing (albeit, not out of control), this does not suggest (to me at least) major problems in the macroeconomy.

[Mea Culpa (1/7/2007): After arriving in Chicago for the AEA meetings, sans laptop, colleague Mike Ward points out that the graph above has percentage change on the vertical axis, whereas I mistakenly viewed the trends as price indices. Therefore, the original argument must be changed a little: we have sigma convergence, or convergence in growth rates, rather than beta convergence, or convergence in levels.

Nevertheless, I think my original conclusion stands - if we saw Texas property prices delcining along with U.S. property prices, I might be more concerned about an macroeconomic problems.]

Careful there Craig, but I think you are confusing covergence in rates of change with convergence in levels. US and Texas growth rates of prices are converging, not housing price levels. It looks like US and Texas prices are continuing to diverge (if growth rates are the same) or are diverging at a faster rate (if a gap in growth rates remains).
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