Thursday, December 08, 2011

More House Prices and Current Account Deficits

Continuing to think about the relationship between house prices and the current account deficit, I put together the following chart showing house price changes in the US (measured by the FHFA's house price index) alongside the US's current account deficit over the past 30 years. Even though I was expecting them to be somewhat correlated, I am still surprised by how incredibly closely the two track each other...

...And given the relatively close coincidence of the two series, the idea that the causation runs both ways between them seems quite plausible to me.


  1. Great post! You've really gotten to the root of the problem. (I think)

    But--tell me--I am interested in your thoughts about the devaition we see from (roughly) 2006 on.

    Let me speculate on that devaition.....

    What happened is that a lot of the capital from foreign investors was going into Wall Street's structured instruments (MBS, CDOs) until the subprime bomb went off...Then the money started to flow into US Treasuries as investors began to batten down the hatches....

    Is that what happened????  And if that's what happened...then what will happen when europe get's its act together and the outflow from USTs rocks the bond market and sends the dollar sprawling?

    Am I being too apocalyptic??

  2. Groot7:24 PM

    The netherlands represents a case that does not fit this story: persistent current account surplus and rising house prices for decades

  3. Groot7:25 PM

    The netherlands represents a case that does not fit this story: persistent current account surplus and rising house prices for decades

  4. Hurricane8:56 AM

    Japan in the 80's, China today and the US in the 1920's are all extreme examples of abnormally large current account surpluses combined with abnormally large real estate price increases - and subsequent declines (although China today isn't there yet).  

    I been thinking there may be some correlation between large current account impbalances in general and real estate price swings - it may not just be the CA deficits that correlate well.  

  5. Interestingly, Japan and China's real estate markets are both correlated positively to the US CAD.  I think it's plausible that the causal driver is a credit cycle, with both capital account movements and real estate prices being the dependent variables.

  6. spencer1:06 PM

    Both stem from the same source-- easy money.

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  8. Merijn Knibbe5:22 PM

    Mr. Mansori,

    you might like the next graph, showing real house prices and deficits on the current account for the Baltic states:

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