The Bell Curve of Doom? - The Case-Shiller Home Price Index
According to the Case-Shiller Composite 20 (metro areas) index, the price of an existing home peaked in July 2006. From the July 2006 peak through January 2008, the price of a representative home has fallen 12.5%. To put this in perspective, if someone had purchased an existing home in July 2006 for $1 million with a downpayment of $125 thousand (12.5% of the purchase price), that someone's equity in the house as of January 2008 would be approximately zero. Unless there was a radical reversal in the direction of home price changes in February, that July 2006 home purchaser was upside down - i.e., had negative equity in his or her home. The Case-Shiller home price index represents a bell curve of doom for recent home purchasers and home lenders.
Note: This commentary was inspired by conversations I have had with Michael Nicoletti, one of the foremost authorities of the current housing crisis and its negative implications for the financial system.
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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