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Tyler Cowen writes in Saturday's NY Times:

A bursting real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.

Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck.

Of course, asset prices haven’t been rising much lately, so many people will need more savings for their retirement or for possible emergencies.

 I'm not disagreeing with Tyler, but his comments made me think about the possibility of a U.S. real estate bubble, and the possibility that even without a real estate bubble/crash, we could experience sustained falling home prices nationally. But there really is no "national real estate market," since all real estate is local (and even varies within an individual zip code), and what is happening in Florida or Nevada could be much different than what is happening in Texas and Michigan.

Using the Office of Federal Housing Enterprise Oversight (OFHEO) quarterly real estate price indexes for U.S. states through the first quarter of 2008 (data available at the St. Louis Fed), I inspected the graphs for the housing price index in each of the 50 states, and found the following:

For four states (Arizona, California, Florida and Nevada) there has definitely been a real estate bubble with a definite crash in prices in in recent quarters (see top chart above of Nevada). For six other states (Hawaii, Maryland, Massachusetts, Michigan, Rhode Island and Virginia), there's some correction in prices going on, but not enough of a price drop to make it a crash (subjective opinion, see middle chart above). For the other forty states, it seems clear that there hasn't been a crash at all, and real estate prices have continued to increase in most of those forty states (see bottom chart above), or have leveled out.

Bottom Line: To the extent that there has been a real estate bubble in the U.S., and a subsequent crash in home prices, it's been pretty isolated to a small group of states like CA, FL, NV and AZ, and most of the country has seen home prices continue to rise, or flatten out. See graphs of each state below:

STATE/BUBBLE?

Source: Real Estate Bubble Is Only in 4 States: CA, FL, NV, AZ