Deflation on the Ski Slopes?

Robert Shiller knows something about real estate and if he is correct in the predictions contained in the above chart then U.S. housing prices have a good deal further to fall and they won’t begin to level off until about 2013. It seems unlikely that economic contraction will end before housing prices stop falling. Thus, the problem of deflation, at least in regard to housing, would have quite a long way to go if Mr. Shilling is right.

Wednesday it was reported that U.S. home prices in October dropped 18% y/y, the most on record.

On a slightly less universal level of importance, another measure of inflation/deflation that is looking tenuous is the price of a ski pass at Vail, according to a Wall Street Journal report. Vail has decided to leave it the same as last year. That’s not exactly deflation, but it’s as close as you can come. A second WSJ story confirms that deals are common in the West this year. As the report says, “Snow has begun falling on ski slopes — and so have prices of lift tickets and luxury hotel rooms at many big destination resorts.”

As I have highlighted in recent posts (here and here), the question of whether the economy goes into a deflation for the fist time since the Great Depression is perhaps the single most important determinant of how long and deep this economic downturn will turn out to be. Clearly housing, commodities, and much of retail are in a deflationary trend. That does not mean that the economy as a whole is in deflation, but it’s a heck of a good start. I will be following the indicators closely.

Comments

[investor88:]

Good article by Jim. Indeed we have to follow and try to interpret the indicators closely going forward. Currently there is not much to cheer about, the unwinding of past excesses continues apace despite the stock bear rally of the past month.

Jan 01 03:55 AM

[JonG:]

More of a question- Is the dashed line off the end of the chart a "technical" estimate of when the index will be returning to 100 which is where it has sat for much of the late 1900's? I am not sure this provides a very good estimate of the timing of when prices will bottom though- there are a lot of other possible outcomes. Also, just because prices are going down because everyone is selling assets to raise cash does not mean we are seeing deflation. Longer term it is hard to believe we will not be seeing the inverse due to the rapid increase in money supply we are experiencing.
Thanks

Jan 01 11:03 AM

[Against Aph...:]

As JonG alludes, inflation is the likely outcome of current government stimulus efforts. Your chart adjusted for massive inflation would look much different. Though house VALUES may not rise for a decade, the powers that be will surely do all that they can to make sure that house PRICES do not continue to plummet.

Jan 01 12:24 PM

[Dimitris:]

One thing about this chart that I think is misleading ... is the "inflation-adjusted" part of it. This chart assumes that you believe the governments numbers for inflation, especially the last 10 years. I'm guessing the peak should be around 170 instead of 200. Either way, it's huge!

Jan 02 01:51 AM

[Kunst:]

Everyone keeps talking about deflation, like three months undoes decades of inflation. Housing was a bubble. Its price is coming down, just like tech stocks in 2001 and oil in the last six months. Those are just cyclical swings of the pendulum. Inflation has been inexorable for the last 60 years; the only question is how much. Right now, people are scared and are holding onto their money. Employment is the key. People won't spend money if they are afraid they don't have income coming in, or are afraid they won't. This is a temporary phenomenon. Once the economy stabilizes and then turns up again, it will be business as usual, maybe a little toned down due to a near-death experience. In the mean time, the world will be awash in US dollars. Tell me that isn't going to push prices up.

Jan 02 02:43 AM

[Dimitris:]

Kunst,

The problem this time is not liquidity, but instead it's insolvency. Regardless of how much money the Fed pumps, the banks are not lending to someone with shaky credit in this economy. Therefore, by the time the velocity of money reaches the market, disinflation will continue in consumer prices. The fear is that asset inflation (housing) will spread to other sectors, mainly the job sector. So, that is why unemployment is key as you say.

Jan 02 09:08 AM

[Joe_in_Camp...:]

Inflation will only affect home prices if incomes rise with the inflation. Over the past 8 years, wages have been stagnant in the face of inflation quarter after quarter. Now employers are freezing wages and cutting wages, let alone laying people off. This is largely deflationary and will affect home prices much greater than inflation. Secondly, once inflation begins to trump deflation, you can bet banks will raise their interest rates on mortgages; that will reduce the purchasing power of home buyers and bring prices down further.

If you're considering buying property, don't. Rent in a comfortable home/location and save as much cash as possible. In 3 - 5 years when the HPI graph falls in line with its trendline since the 1950s or undershoots a bit (due to over capacity), then buy a house.

Jan 02 03:00 PM

[Against Aph...:]

User 330008,

This is not a criticism but a serious question: Given the expectation of inflation, is it a good idea to save up cash and wait for house prices to (hopefully) drop further? Wouldn't it be just as expedient to buy now and bank on inflation wiping out much of the mortgage price in a few years?

I just think that since the govt. loves using inflation to fix problems (while stealing our wealth), and since we are in a huge debt-related crisis, we can bet on them inflating it all away. Yes, income may lag for a while, but I think jumping on the inflation band wagon might be the better play for a 30yr investment.


On Jan 02 03:00 PM User 330008 wrote:

> Inflation will only affect home prices if incomes rise with the inflation.
> Over the past 8 years, wages have been stagnant in the face of inflation
> quarter after quarter. Now employers are freezing wages and cutting
> wages, let alone laying people off. This is largely deflationary
> and will affect home prices much greater than inflation. Secondly,
> once inflation begins to trump deflation, you can bet banks will
> raise their interest rates on mortgages; that will reduce the purchasing
> power of home buyers and bring prices down further.
>
> If you're considering buying property, don't. Rent in a comfortable
> home/location and save as much cash as possible. In 3 - 5 years
> when the HPI graph falls in line with its trendline since the 1950s
> or undershoots a bit (due to over capacity), then buy a house.

Jan 02 03:33 PM

[john1:]

Just more unpatriotic negativity from liberals who hate America, and the troops.

Jan 02 06:11 PM

[scotty1560:]

He might be right..if I'm correct the peak of ARM resets is 2012?

It certainly feels ugly out on the street..foreclosures everywhere..
unless the government steps in and backs the lenders on foreclosures..
let the primary homeowner walk...most have taken enough blows..loss
of down payment and improvements..loss of credit rating...get it over with
and build a new base...

Right now the banks are very slow and properties are just running down sitting
vacant...that is an on going cancer...in the interest of the country to stabilize
the foreclosures and the banks need to maintain the empty homes..

Investors properties are a different case study, but I say support the primary homeowner...guys that bought in the last 3-6 years are getting slaughtered.

Jan 04 02:22 AM