government-determined resource allocation,isthebestapproach. Although the price of oil has receded inrecent months, the trend in oil prices hasbeen positive so far during this decade(Figure 1). Oil prices have been creepingupward since December 2002 but did notinterrupt the post-2003 surge in housingprices (Figure 2). The oil price increase wascontinual, however, through 2006—risingfrom $30 per barrel during late 2003 toalmost$70perbarrelbymid-2006.Thatsus-tainedincreaseinoilpricesisassociatedwitha declining trend in U.S. non-oil consumerspending growth and probably caused hous-ing price increases to slow during 2006.
After all, most new home construction inmajor metropolitan areas was occurring infar-flung suburbs, and energy cost increasesmeant households could no longer committo lifestyles requiring high energy and com-muting costs. The slowdown in home priceappreciation was tipped into a downturn by the subsequent, increase in oil prices thatlasted from early 2007 through mid-2008.Now,althoughoilpriceshavepulledbacksubstantiallyfrompeaklevels,themainforcepropellingeconomicdeclineisthecontinueddevaluation of the nation’s housing stock.That decline is sustained by the now-largeinventory of unsold homes and gatheringmomentum in mortgage defaults and homeforeclosures.
Figure2showstheCase-Shillerindex of home values—a composite indexbased on home price samples in 20 U.S.major metropolitan areas. It shows thathomepricechanges hadmoderated forafew monthsduringthespringof2002.
Hadthatmoderation been maintained, home pricesmighthaveremainedclosetotheirlong-termtrend through 2003, as shown in Figure 2.Onereasonfortherapidescalationinhomepricesthrough2006,whichwasfarfasterthanthelong-termtrendandhappeneddespiteris-ingoilprices,wasthepopulistpoliticalagenda ofpromotinghomeownership.Thegenesisof a reinvigorated push for increased homeown-ership can be dated to President Bill Clinton’ssupport,throughtheDepartmentofHousingandUrbanDevelopment,forexpandedhome-ownership by first-time, low-income, andminorityhomebuyers.Policymakersweakened
Now, althoughoil prices havepulled backsubstantially from peak levels,the main forcepropellingeconomic declineis the continueddevaluation of the nation’shousing stock.
0204060801001201401602000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 1World Spot Crude Oil Prices
Source: U.S. Energy InformationAgency.
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