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A Sustainable Housing Recovery?

NEW HAVEN – Volatility in the housing market has long been known, but until now it has never been visible in so many places around the world at the same time. Indeed, the year 2009 might even be a milestone marking a new era of volatility.

Since 2000, we have seen the most dramatic evidence ever of speculative bubbles in markets for owner-occupied homes. Home prices exploded after 2000 in North America, Europe, and Asia, and in many isolated places elsewhere in the world. Markets peaked in 2007, and then fell sharply in many of these places with the onset of the global financial crisis. Surprisingly, prices rebounded in some places in 2009. It seems the story never ends.

In the United States, the S&P/Case-Shiller 10-City Home Price Index recorded the biggest turnaround since the index began in 1987, rising 5% (a 15% annual rate) from April to August 2009, after having fallen 7% (a 21% annual rate) in the four months from December 2008 to March 2009. Recent increases in home prices have also been seen in Australia, the United Kingdom, Hong Kong, Korea, Singapore, and Sweden, and optimistic talk is heard in still more places.

Housing prices are on a rollercoaster ride, and we may never be able to make complete sense of their movements, other than to understand the volatility that they represent. Indeed, in a volatile speculative market, where people buy and sell in anticipation of further price movements, history confirms that price movements will be hard to explain, even after the fact. They reflect changing investor psychology, which is hard to discern, and new information, which may still be amorphous and ambiguous.