Loungani: Housing Prices Still Have a Long Way to Drop

International Monetary Fund Economist Prakash Loungani studied historical housing price data from the last four decades to gauge the current recovery progress of the housing industry. His analysis indicates that housing prices across the globe still face substantial correction even after the precipitous declines we’ve seen over the last three years. Jessica Holzer of the Dow Jones Newswires reports:

Loungani, at a National Economists Club luncheon in Washington Thursday, presented his analysis of housing busts since 1970 in the countries that make up the Organization for Economic Cooperation and Development. His prediction: Home prices will fall much farther and for much longer.
On average, the previous housing slumps lasted 18 quarters, with prices dropping 22% from peak to trough. By contrast, the current housing slump has lasted only 14 quarters, during which prices have dropped just 15%.
But the latest boom was so much bigger than the previous ones that it’s logical to anticipate an even more brutal downturn, Loungani argued. Prices rose 113% over 41 quarters, compared with 39% average price increase over 39 quarters seen in the previous booms. Loungani likened the current cycle to a rollercoaster that has roared up a steep hump and now needs to come down again…
Loungani marshaled other evidence that home prices are still inflated. He found that prices in OECD countries in 2009 were substantially out of whack with rents and incomes in those countries, compared to average values from 1970 to 2000. In the long run, he argued, incomes and rents will act as weights on home prices, bringing them back to earth…

Loungani said his analysis of prices and rents in U.S. metro areas suggests that many markets on the West coast and in parts of the Northeast could yet see prices plummet a further 30%-40%.

As the negative consequences of past policy decisions continue to manifest in the housing sector, it is important that our leaders in Washington make the necessary efforts to reduce the reckless lending and securitization practices that helped initiate the bubble.

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