US house and home prices are now back above where they were pre-crash. The various Case Shiller measurements of house prices are up 5.1%, 5.6%, on the year to October 2015. Which gives us a very interesting little lesson in something called the wealth effect. For as we also know today US consumer confidence has leapt to levels last seen in 2001. And we do have a theory about why these two might or even should be linked–that wealth effect. As we feel wealthier we save less and consume more. This is as a result of a mix and match between Modigliani and Friedman, the lifetime and permanent income hypotheses. When this goes into reverse it’s one of those things which causes horrible recessions, as Dean Baker says about 2008 and 2009. Here we’re on the upswing:
20-city property values index rose 5.1 percent from October 2015 (forecast was 5 percent) after a 5 percent gain in the year through September
National home-price gauge increased 5.6 percent from 12 months earlier, the biggest gain since July 2014, to a record 185.06; the measure first exceeded the 2006 pre-recession peak in September
Obviously this cannot go on forever:
U.S. home prices hit a new peak in October, according to monthly figures, though the data-provider warned that the pace of growth cannot continue forever.
Those numbers in detail again:
The S&P CoreLogic Case-Shiller Indices, which covers the entire nation, rose 5.6% in the 12 months ended in October, up from the 5.4% increase reported in September.
The 10-city index gained 4.3%, up from 4.2% in September. The 20-city index gained 5.1% year over year, up slightly from a 5% increase in September.
Thus, if house prices rise we not only might but we should see a change in consumer confidence and then in consumer spending as this works through the system. And, as above, we have just seen a leap in US consumer confidence. Fun when economic theory at least arguably comes together, isn’t it?