Thursday, June 12, 2008

Yellen from the Rooftops!

Fed president discusses housing

Janet Yellen, President of the Federal Reserve Bank of San Francisco, recently gave a speech about the various headwinds facing the economy. This is what she said about housing:
Now let me turn to the second of the three main factors behind the current economic weakness—namely, the housing cycle. I have mentioned that earlier in this decade when financial markets were "awash in liquidity," bubble-like conditions emerged in many areas of the economy, including housing. During this period, housing construction was very strong and housing prices soared. In fact, the ratio of house prices to rents—a kind of price-dividend ratio for housing—reached historical highs by early 2006, suggesting that house prices might be well above those that could be justified by fundamentals.

Since then, housing markets have "hit the skids." In inflation-adjusted terms, residential construction fell by 13 percent in 2006 and by 14 percent in the first half of last year. Of course, once the financial shock hit last summer, things got even worse, with real residential construction dropping at a 24 percent rate on average since then. And, indicators of conditions in housing markets are pointing lower for the future. Housing starts and permits as well as sales are trending down, and inventories of unsold homes remain at very high levels. These inventories will need to be worked off before construction can begin to rebound.

I’ve already discussed the precipitous fall in house prices nationally, so it’s striking to note that, even with these declines, the ratio of house prices to rents remains quite high by historical standards. That, of course, suggests that further price declines may be needed to bring housing markets into balance. This perspective is reinforced by futures markets for house prices, which expect further declines in a number of metropolitan areas this year. In particular, the Case-Shiller composite index for home prices shows a 15 to 20 percent year-over-year decline in the second half of this year.

The bottom line is that construction spending and house prices seem likely to continue to decline well into 2009.


  1. i appreciate the new activity on this blog. however, this used to be a dc based blog, posting about dc area stuff, like pictures of random dc rowhomes.
    everything now is UK or new york and random stuff. please get back to your roots

  2. gt,
    I'm sorry you're not happy with my content. I'm new to blogging. It helps me to learn what readers like and don't like, so thank you for your constructive criticism.

    In the two years I've been visiting this blog, it has always been a blog about the housing bubble throughout the USA, but with special emphasis on DC.

    My interests lie in the bubble on a national level, including both the causes and effects of the bubble, so that's what I am blogging about. I'm sure David will continue posting the same stuff he would have posted if I weren't here.

    In time, as I learn what readers like and don't like, hopefully I can improve the quality of my blog posts.

  3. I miss the DC info as well