In an optimal long term economic scenerio, economists like to get all Hansel’ed and Gretel’ed about the idea of keeping the the economy from being overheated or stagnant by avoiding having to use extreme remedies (such as 17 consecutive 25 basis point federal funds rate increases) to keep the economy on track. Remember that the third bowl of the bear’s porridge was not too hot or not too cold, but just right. The problem in many economies, especially in the US, has been the reliance on the housing market for economic strength.
A study was released [Smart Economist] by Spanish economists Jose Ceron and Javier Suarez that looked at the volatility of housing markets on an international level and found the following:
“hot” and “cold” markets differing mainly in the degree of price volatility.
Each market phase lasts about six years and occurs with roughly the same frequency, but the number of transactions is higher during hot markets, and the selling times shorter.
During high-volatility phases, housing prices are four times as variable as in the low-volatility phase yet high-volatility is associated with the “cold” cycle of the housing market [the most interesting point to me].
Country-specific economic conditions help predict the switch between hot and cold cycles.
Country-specific variables such as GDP, unemployment, and interest rates, have significant effects on housing markets – with interest rates having the strongest effect. Interestingly, these effects have the same intensity whether the housing market is in a high- or low-volatility phase.
The paper concludes that price volatility defines a change in cycle (boom and bust, hot or cold), not the number of sales.
Whats interesting to me his how much the idea of a national housing “bubble” bursting is premised on the “perception” that prices will drop sharply soon, when that generally has not occured. The anticipation makes market participants see the housing boom as over.
In other words, the only significant transactional evidence of a changing market to date has been lower number of sales but not lower prices. Certainly many other factors such as appreciation rates dropping or disappearing, rising inventory and higher mortgage rates show the potential for problems.
Lower prices are expected to come in some form or another (depending on your position), but it seems we are now more in a middle ground area rather than a “cold” cycle by the author’s definition, but growing economic weakness would suggest that the housing market is definitely not just right.