Tuesday, October 27, 2009

Home Prices in August

The OFHEO index showed a decline from July to August, which may be notable given that construction costs went up. Yet, over the same time frame, the Case-Shiller index increased even more than construction costs, with the ratio of home price index to residential construction PPI reaching its highest level of the year.

Sean MacLeod also informed me that the RPX index was up a bit in August, although the RPX increase was not enough to offset the increase in construction costs.

A genuine housing recovery will NOT have real housing prices increasing perpetually (or have the huge amount of construction we had 2004-6), but the level of housing prices may need to be a bit higher than it is now in order to sustain normal construction activity. Recall that construction activity depends on the ratio of home prices to construction costs.

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