When Falling Housing Prices Signal Good or Bad Economic News
8 reported
A reader question about falling housing prices in Denver prompted an NPR analysis of when such declines benefit or harm the economy. Karl Baumgartner, a 29-year-old internal medicine resident in Denver, reported that home prices in the metro area have fallen more than 2% year over year, with rents dropping even more. He and his friends, as renters, are "ecstatic" about the lower costs, with one friend renegotiating a lease for about $500 less per month. The article explores two scenarios: falling prices due to increased supply, which can signal a healthy market, versus falling prices due to decreased demand, often linked to economic distress like Detroit's collapse. Economists interviewed note that supply-driven declines free up income for other spending, while demand-driven drops can lead to underwater mortgages, forced sales, and broader financial spillovers. The article concludes there is no simple rule to distinguish good from bad declines, but key factors include whether the drop is driven by supply or demand and whether land values rise or fall.
What’s reported
Denver metro area home prices have fallen more than 2% year over year, according to the S&P Cotality Case-Shiller Home Price Index.
Rents in Denver have fallen even more dramatically than home prices.
Karl Baumgartner, a 29-year-old internal medicine resident in Denver, says he and his friends are "ecstatic" about falling prices.
One of Baumgartner's friends renegotiated a lease for about $500 less per month by showing comparable apartments were cheaper.
Detroit saw home prices fall by more than 80% during the housing bust of the 2000s, linked to a population drop of nearly a third between 1990 and 2010.
Economists say falling home prices can create a "wealth effect" making homeowners feel poorer, and can lead to underwater mortgages and forced sales.
A 2019 study by economists Chang-Tai Hsieh and Enrico Moretti estimated that housing restrictions lowered U.S. economic growth by 36% between 1964 and 2009, though subsequent research found that overestimated.
Zillow chief economist Misha Fisher says demand-driven price declines are often a bad sign, while supply-driven declines are "typically a healthier way to keep home prices in check."
Key figures
Karl Baumgartner, 29-year-old internal medicine resident in Denver
Daryl Fairweather, chief economist of Redfin
Eric Zwick, economist at the University of Chicago Booth School of Business
Kevin Matthews, housing advocate with Denver YIMBY
Misha Fisher, chief economist of Zillow
Chang-Tai Hsieh, economist (referenced for 2019 study)
Enrico Moretti, economist (referenced for 2019 study)
Sources: NPR
