Short-term drop in housing prices doesn't signal future collapse, study says

March 10, 1991

A collapse in residential real estate prices is highly unlikely, say Denise DiPasquale of Harvard's Joint Center for Housing Studies and William Wheaton of MIT's Center for Real Estate Development.

Their recent study of future home prices finds that while there may be short-term downturns in local markets over the next decade, "a systematic national depression in single-family house prices is extremely improbable."

Fears of such a depression were aroused last year in anothestudy. That study suggested that declining household formation would leave house prices almost flat over the next decade -- sending them rapidly down in constant dollars, or when adjusted for inflation. Such a realignment in the value of the nation's housing stock could have a significant impact on the overall economy.

The DiPasquale/Wheaton study, however, draws quite different conclusions.

In "Housing Market Dynamics and the Future of Housing Prices,Ms. DiPasquale and Mr. Wheaton argue that anticipated changes in the country's demographic structure will have a less negative impact on housing demand than previously thought.

They said that the older age distribution of the population will tend to generate higher homeownership levels -- at least partially offsetting the negative impact on prices of lower household formation. Still, the net effect of these will be to reduce the demand for single-family housing.

The major finding in the DiPasquale and Wheaton study, however, is that the supply of new single-family units, or the rate of new construction, is extremely sensitive to changes in housing prices as well as other, more general market conditions.

Thus, if housing prices did start a significant decline, new construction would diminish, and this in turn would quickly arrest any further decline in prices. They concluded that with price-elastic construction in the

short run, and a rising long-run supply schedule for the stock of housing, it is almost impossible for prices to undergo any significant and sustained decline.

Ms. DiPasquale and Mr. Wheaton estimate that housing prices should rise over the next decade at an average rate that is slightly faster than the overall consumer price level. Given the current recession, however, and the likely course of the nation's economy, house prices will be softer over the next three years, rising less than the Consumer Price Index (CPI).

Faster-than-CPI growth in housing prices should occur with a general economic recovery, in the middle or end of the decade. While not pessimistic about future housing prices, the study does point out that the kind of very rapid price growth that occurred in the late 1970s and early 1980s is unlikely to be repeated.

The study is available from the Massachusetts Institute oTechnology Center for Real Estate Development for $10.

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