Wednesday, September 16, 2009

Construction Costs and the Housing Recovery

Copyright, The New York Times Company

Yesterday the Bureau of Labor Statistics released its producer price index for residential construction. Its significant increase from July to August is a good sign for the housing market.

The producer price index for single-unit residential construction measures the average change over time in the selling prices received by domestic producers of materials for houses. The chart below displays the index for each month of 2008 and 2009.

source: Casey B. Mulligan, using data from the Bureau of Labor Statistics

The price index is of economic interest because it is an important determinant of the prices of existing homes. Few people want to pay more for an existing house than they would pay for having one built new. As a result, the housing P.P.I. is an important ingredient in economic forecasts of housing prices. For example, once it was clear that the housing “bubble” was over, it was (part of) the basis for my forecasts last fall of how far housing prices would ultimately fall (see also Edward Glaeser’s post).

Additionally, the housing construction P.P.I. is more amenable to real-time analysis than are the housing price indices. For example, the Bureau of Labor Statistics releases its P.P.I. within about two weeks of the end of a given month, whereas the Case-Shiller index is not released for another two months.

An end to the housing price decline is welcome because low housing prices are the main reason for the extraordinary prevalence of foreclosures.

When housing prices fall, many homeowners owe more on their mortgage than their house is worth (that is, “their home equity is negative”), and even a homeowner with plenty of income can gain financially by letting the bank take his house rather than continuing to pay his mortgage in full. That’s why Stan Liebowitz, a professor at University of Texas, Dallas, found that negative equity was a more important factor than unemployment in causing the foreclosures, and why the researchers John D. Geanakoplos and Susan P. Koniak argued that foreclosures are “stunningly sensitive” to the amount of home equity.

That’s one reason why it was good news yesterday to learn that the housing-materials P.P.I. was greater in August than it was in July. Once housing prices stabilize, homeowners will start to accumulate equity again, and we can eventually close the book on the foreclosure crisis.

1 comment:

David said...

Thanks for sharing the statistics of the housing construction market.I think that there will be more increase in home construction in coming months.

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