Sunday, August 26, 2007

"Apres moi, le deluge"

France's King Louis XV came to mind this evening as I read two articles in today's NY Times [doesn't this happen to you?]. As described by the introductory paragraph in his entry in Wikipedia:

Louis XV, called the Beloved (French: le Bien-Aimé) (February 15, 1710 – May 10, 1774), ruled as King of France and Navarre from 1715 until his death. Unexpectedly surviving the death of his entire family, he enjoyed a favourable reputation at the beginning of his reign. However, in time, his inability to reform the French monarchy, his lack of morals, and his foreign policy on the European stage lost him the support of his people, and he died as one of the most unpopular kings of France.

Among other things, Louis XV famously said, "Apres moi, le deluge [After me, the deluge]." While some may debate whether he meant "after me, comes the revolution" or "after me, I don't care what happens," I think of Alan Greenspan and Ben Bernanke. After a real estate boom fueled by the Greenspan-led Federal Reserve policy of cheap money and now causing [I hope] many sleepless night for Bernanke as the financial markets teeter on the edge of panic, the NY Times writes in one of two articles that the median home price in the US is going to decline 1-2% this year "for the first time since federal housing agencies began keeping statistics in 1950." We now face the prospect of price declines through 2009:

In all, Global Insight expects a decline of 4 percent, or roughly 10 percent in inflation-adjusted terms, between the peak earlier this year and the projected low point in 2009. In California, prices are expected to decline 16 percent — or about 20 percent after taking inflation into account.

But wait, it gets better:

On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade, according to Moody’s Economy.com, a research firm.

The Times article discusses the Case-Shiller Index (CSI), to show that although government data has never reported declines in the past, CSI's method does demonstrate that they've happened:

For all the attention that the uninterrupted growth in national house prices received, some economists argue that it was misplaced. The Case-Shiller index, which many experts consider more accurate than the government measure, did show a drop in prices in the early 1990s. (Unlike the government’s measure, it includes mortgages of more than $417,000, which are not held by Fannie Mae or Freddie Mac.)

After adjusting for inflation — the most meaningful way to look at any price, economists say — even the government’s index fell in the early 1990s.

The Times also has a great graphic, with an explanatory video, showing YoY growth in home prices in 19 cities compared to the national median, using the CSI. The graph shows that DC metro's inflation-adjusted housing prices have been clearly outpacing the national median for most of this decade and have been declining for the past four quarters.

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