A recent note from Brookings on the nature of the ongoing housing crisis in America has opened up with a bombastic statement:
Liquidity moves markets!Follow the money. Find the profits!
It sounds plausible. And it sounds easy enough to understand for politicos of all hues to take up the claim and run with it. There is is even a handy chart to illustrate the argument:
Except the claim is not exactly consistent with the evidence presented in that chart.
For starters, Case-Shiller Index covers 20 largest metropolitan areas of the U.S., which is a sizeable chunk of population, but by far not the entire country. And rents, as the Brookings article correctly says, are rising across whole states (the article, for example referencing California, which is way larger than the largest urban areas of the state alone). Second point, the article is completely incorrectly uses nominal house prices inflation against real (inflation-adjusted) income growth figures. If the converse of the article claim held, and real incomes exceeded housing price inflation, it would mean rising purchasing power for American households shopping for houses. However, that is not what the housing markets are historically, longer-term about. They are more about hedging inflation. The third, and more important point is that the article refers to the last 5 years. Why? No reason provided. But even a glimpse at the chart supplied in Brookings paper is enough to say that the same problem persisted prior to the Great Recession, was reversed in the Great Recession, and then returned post-Great Recession.
What’s really happening here?
Ok, let’s take four time series:
- House prices 1: Median Sales Price of Houses Sold for the United States, Dollars, Annual, Not Seasonally Adjusted;
- House prices 2: S&P/Case-Shiller 20-City Composite Home Price Index, Index Jan 2000=100, Annual, Seasonally Adjusted (same as in Brookings article);
- Income 1: Real Median Household Income in the United States, 2017 CPI-U-RS Adjusted Dollars, Annual, Not Seasonally Adjusted (same as in Brookings article); and
- Income 2: Nominal Median Household Income in the United States, Current Dollars, Annual, Not Seasonally Adjusted
- Real Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points; and
- Nominal Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points.
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