by Calculated Risk on 1/11/2005 11:18:00 PM

Here is a look at the period from Jan 1998 until Dec 2004. I chose this period since this is when it appears housing prices accelerated.

NOTE: I'm posting this now and will update the post when new data for 2004 becomes available. Over the first 9 months of 2004 housing prices increased 8.9% while Household income was stagnate. So any bubble at the end of '03 will be larger now.

1) Home prices increased 49% nationwide during the 6 year period.
SOURCE HPI: OFHEO

2) Although real household incomes have been stagnate, with inflation household incomes have increased 17% from ’98 to ’04.
SOURCE: Census Bureau

3) Mortgage rates (30 year fixed) declined from 6.99% in Jan 1998 to 5.88% in Jan 2004.
SOURCE: FreddieMac

The drop in interest rates would predict a 19% increase in potential debt to keep the buyer’s monthly payment the same. However taxes would have also increase based on the value of the home. Therefore, a simple model would have predicted a 15% increase in prices due to changes in interest rates and taxes, and 17% due to increases in household incomes (because of inflation). Taking the multiple, the model would have predicted an increase of 34.5%, instead of the 49% increase we have observed.

This would argue (if ’98 prices were reasonable) that home prices are approximately 14% overvalued due to speculation or easy terms (ARMs, 0% down, etc). If mortgage interest rates increase, or we have a recession (lower household income), home prices would be even more overvalued.

A similar analysis was performed by the FRBNY Economic Policy Review, Dec 2004 "Are Home Prices the Next Bubble?"
Their conclusion: "The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates."

More to come ...

by Calculated Risk on 1/08/2005 12:20:00 AM

Dr. DeLong does an outstanding job with his post "Social Security Talking Points". He points out that any trouble with Social Security Retirement Insurance is small in comparison to other fiscal problems facing the United States. He writes:

Bigger fiscal problems include:

• The current $600 billion a year General Fund deficit.
• The long-run problems of finding financing for and controlling the growth of rapidly-rising Medicare and Medicaid spending.
• The need to make sure that the General Fund has the resources to meet its commitments without undue strain after 2020--when it will no longer be able to borrow from the Social Security Trust Fund.

The following site, The Public Debt Online (run by the US Treasury), is useful in checking the size of the General Fund Deficit. Our National Debt as of Jan 6, 2005 is:

$7,595,653,400,600.33 (that is almost $7.6 Trillion)

As of Jan 6, 2004, our National Debt was:

$6,991,488,657,454.93 (just under $7 Trillion).

So the General Fund has run a deficit of $604 Billion and change over the last 12 months. That is a crisis.