The long-term fall in the housing price index

The price index of housing has the biggest input into the overall CPI among all major expenditure categories (e.g. food, transportation, etc.) Thus, the evolution of this index might have the largest influence on the rate of price growth in the USA. Two years ago we wrote a paper predicting the long-term behavior of the housing index relative to the overall (headline) CPI. This is a short excerpt:

“… Figure 9 displays the difference between seasonally adjusted headline CPI and the housing index for the period after 1967. Figure 10 details the period after 1998. One can conclude that after 2008 the housing index will be likely evolving at a lower rate than that associated with the headline CPI. Currently, we observe a turning period with higher volatility. The difference between the core CPI and the housing index is characterized by an almost constant duration of negative and positive trends – around 11 years. Accordingly, the next linear trend has to be positive.

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Conclusion

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The difference between the headline CPI and the housing index is characterized by an almost constant duration of negative and positive branches – around 11 years. The current period of negative slope in the difference is closing to its turning point in the next year or two and characterized by higher volatility. The next trend has to be positive, i.e. the housing index will be growing at a lower rate than the headlining CPI.

 

Figure 9. The difference between the headline CPI and the housing index between 1967 and 2007. Notice three periods of practically linear trend and two very short periods of trend change: in 1987 and 1998. The observed linear trend has been practically changing every 11 years. Notice an elevated relative volatility of the difference at higher frequency.

Figure 10. Same as in Figure 9 for the period after 1998. The housing index has been growing faster than the headline CPI. Currently, a period of the trend change is likely observed with the housing index changing to a rate below that associated with the CPI. One can expect that the next 10 years will be poor for the housing market.”

Two years later we can compare the above prediction with the measured time history of the index. Figure 1 presents the difference between the headline CPI and the index of housing for the period between 1998 and 2010. All our predictions on the future evolution of the difference were right. Firstly, volatility was very high in 2008 and 2009. Secondly, one can observe the new trend which has been emerging since 2009. Thirdly, this new trend in the difference is a positive one.

Considering the aforementioned duration of the previous trends one may expect the new trend to last around 11 years, i.e. till 2010. Without loss of generality, the difference may also have a different duration and thus a different slop of the positive trend. The next two to three years might help resolving the slop value.

All in all, the index of housing will be growing at a lower rate than the headline CPI. Since we expect the overall CPI to be falling during the next five to ten years (see our posts on deflation) the index of housing will be also decreasing in absolute terms. Other expenditure subcategories may grow in absolute terms, however.

Figure 1. The difference between the core CPI and the index of housing between 1998 and 2010. One can observe a new trend in the difference – the index of housing has been growing at a lower rate than the core CPI since 2009.