Friday, May 30, 2008
Aside from being the only known previous sighting of The Economist's brick metaphor for housing, the remarkable thing about the magazine cover you see below is that it is three years old! Clairvoyance perhaps?
At the time in 2005, it looked as though house prices in the U.K. were about to drop like a brick, but then they staged a miraculous recovery only to drop again in recent months.
A report in today's Wall Street Journal has a nice little graphic to help explain the 2005 Economist cover above:
U.K. home prices took their sharpest tumble in May in the 17 years of recorded data, raising the risk that the world's fifth-biggest economy will go into a recession, some economists say.As for The Economist, look for another brick on the cover (or some variant on the theme) sometime in the weeks or months ahead.
House prices fell 2.5% in May from the prior month, the largest decline since the Nationwide Building Society's monthly index began in January 1991. Prices fell 4.4% from a year earlier, the biggest drop on this basis since December 1992, the U.K.'s last recession.
Prices have fallen for seven months in a row, the longest stretch since 26 years ago, when a price crash saw thousands of homeowners slip into negative equity, when their houses were worth less than the debt they owed on them.
They appear to be getting warmed up in the current issue when looking at the U.S. home price data, but they'll probably turn their attention inward in short order:
“A DESTABILISING contraction in nationwide house prices does not seem the most probable outcome...nominal house prices in the aggregate have rarely fallen and certainly not by very much.” Alan Greenspan's soothing, if rather verbose, words on America's housing market in 2005 rank high on history's list of infamous predictions. But to be fair, most American economists shared his view that it was highly unlikely that average nationwide home prices would drop. That was the sort of thing that happened only during a deep depression, like the 1930s.Hmmm... managed to get that Greenspan pearl of wisdom in both of today's posts so far ...
Unfortunately, new figures this week reveal that house prices have already fallen by more over the past 12 months than in any year during the Great Depression.
In nominal terms, the average home is now worth 16% less than at the peak in 2006, and the large overhang of unsold houses suggests that prices have further to fall. If so, this housing bust could well see a bigger cumulative fall in prices than the 26% real drop over the five years to 1933. Most people would call that a pretty destabilising contraction.