There has been a considerable difference between the two indexes of housing prices. Calculated Risk notes a new paper analyzing why and notes these implications:
This suggests that one of main differences between OFHEO and Case-Shiller was that Case-Shiller included many non-agency homes financed with subprime loans. These homes saw more appreciation during the boom, and are now seeing larger price declines.
Whatever the reasons, the Case-Shiller index seems to more accurately reflect the current price declines in the housing market, as opposed to the OFHEO index. And this has significant implications for the economy.
The Fed uses the OFHEO index to calculate the changes in household real estate assets. If the OFHEO index understated appreciation during the boom that means households have MORE real estate assets, and more equity, than the current Flow of Funds report suggests.
That sounds like good news, but … that also means that during the housing boom, the wealth effect was larger, and the impact on GDP greater, than current estimates. This also means – if OFHEO understated appreciation – that the negative wealth effect, and the drag on GDP, will be probably be greater than expected during the housing bust.
I have long preferred the Case-Shiller Index, this gives me even more comfort in doing so. If you can call a bigger bubble and a bigger decline comforting.
Of course this also means housing will be less expensive, as this graph of the Case-Shiller Index shows:
In the long run that is necessary for the economy to recover. More importantly we will have more affordable housing, a very good thing.
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