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Housing: Act Local; Think Global, Or At Least Try

The Economist magazine has compiled its latest global housing stats [subscr] [1]. The magazine, which I subscribe to and enjoy, has been calling for a sharp housing correction in the United States since about 2003. This compilation showed a slowdown in the rate of appreciation in 50% of the markets surveyed.

America is one of them. In the year to the fourth quarter of 2006, the price index compiled by the Office of Federal Housing Enterprise Oversight (OFHEO), a regulator, rose by 5.9%, the lowest annual rate for seven years. The OFHEO index gives a more accurate picture than more timely series, because it tracks the value of the same houses when they are resold or remortgaged. As a result the index is not pulled this way and that by changes in the mix of houses sold.

The housing slowdown has already made itself felt in the GDP statistics, as homebuilders have cut back on construction. So far, it has not hurt consumption, the principal engine of the American economy. But that may yet happen. Flatter prices may encourage homeowners to rein in their spending. And troubles in the subprime mortgage market may spread, inhibiting lending to borrowers in better standing, and thus feeding back into prices.

The Economist places great faith in the OFHEO for the US stats because the use of repeat sale indicators [2], which I think is very naive.

American homeowners may take heart from the experiences of two other once-booming markets: Australia’s and Britain’s. Both stalled in 2005, yet both have clocked up house-price inflation of around 10% in the past year.

I am struck by the fact that most of Europe seems to be appreciating faster than the US market and how Japan showed a decline even though their central bank recent increased interest rates.