By Jeff Harding
Good news is breaking out all over it seems. The housing market is finding a bottom and in some key markets prices are rising. The Case-Shiller report, the National Association of Realtor’s median price report, and the Federal Housing Finance Agency (FHFA) price indexes all report gains in sales and home prices.
The S&P/Case-Shiller index for home prices in 20 major cities in the three months ended June 30 was up 1.4% from its level in the three months ended May 31. It was the first time the index rose two months in a row since mid-2006. Prices gained in 18 of 20 markets, but were still down 31% from their July 2006 peak. …
A separate price gauge calculated by the Federal Housing Finance Agency, which uses sales price information on mortgages owned or backed by government-backed mortgage investors Fannie Mae or Freddie Mac, showed that prices increased 0.5% in June from May.
Meanwhile, sales of existing single-family homes in California increased 12% in July from the same time a year ago, the California Association of Realtors said. …
Las Vegas and Detroit were the only markets that saw monthly price declines in June. Home prices in Las Vegas have dropped by 54.3% from the August 2006 peak, moving ahead of Phoenix, which is down by 53.9% from its June 2006 peak.
More importantly, the inventory of new houses for sale went down to 7.5 months in July. It was 12.4 months in January of this year. That means that instead of a normal, say 4 to 6 month supply of new homes, there was a 12.4 month supply. This indicates that the huge inventory of unsold houses from developers is seeing recovery. These homes are the most difficult to sell because these sales are usually done either at the direction of the banks who financed the construction of these units or by the banks themselves. Foreclosure sales are complicated and take time to bring to the market.
The overall inventory of used homes for sale is still quite high, 9.4%, but it is coming down. Recovery will be deemed to have occurred at the aforementioned 4 to 6 month supply level of inventory.
Click to enlarge Courtesy Calculated Risk
There are several reasons why sales are increasing. First is the $8,000 first time home buyer credit created created as part of the American Recovery and Reinvestment Act passed in February. In California, the president of the Realtors Association, “said nearly 40% of first-time buyers said they would not have purchased a home without the tax credit, and called for Congress to extend it beyond a Dec.1 deadline as well as open it up to all buyers, not just first-timers.” What a demonstration of bad economic thinking. More on his below.
Second, and which is probably the most important factor, is that prices have been declining which makes homes more affordable. From the height of the housing boom in 2006, homes were priced so high that only 5% of homes for sale could be afforded by those earning the median income. That rate has now increased to 72.3% of all homes sold. There is some controversy as to the credibility of the National Association of Realtors Affordability Index, but the general point is that prices have come down, 35% since the peak according to the Index, which means more people can afford to buy homes. By July, 2009 the national median home price was down 15% over the prior year.
Click to enlarge Courtesy Calculated Risk
If 40% of all sales are driven by government credits, then one must ask: how long will it last? The credit is due to expire by December 1, 2009 but I think we can all guess what the Administration and Congress will do. Harry Reid and Chris Dodd are pushing an extension of the credit and increase it to $15,000. The Realtors are heavily lobbying this issue claiming that the credit would create another 300,000 to 350,000 home sales. The question is: why? Wasn’t it the housing boom, goosed by cheap Fed credit and various government guarantees, that set off our current crisis? Why do they want to reignite it and cause the same problems that we are now trying to recover from? Bad idea.
The government money has to run out at some point and they will stop propping up the housing market so the impact will only be short-term, contra to what the Keynesian economists at the National Association of Realtors say. There are still deflationary forces at work which have yet to run: continuing unemployment, another round of mortgage rate adjustments on ARMs, rising mortgage defaults on all mortgages, including prime loans, the impact of the federal deficit and debt on mortgage rates, and a shaky commercial real estate market.
Among U.S. homeowners with mortgages, a record 7.32 percent were at least 30 days late on payments in July, up from about 4.5 percent a year earlier and 7.23 percent in June, according to monthly data from the Equifax credit bureau.
The rate of subprime mortgage delinquencies rose to 39.48 percent from 39.25 a month earlier, though it is still below levels reached earlier this year, according to the data obtained exclusively by Reuters. …
Bankruptcy filings were up 35 percent in July compared with a year earlier, accelerating from both June and May. …
Auto delinquency rates rose for the third straight month in July and are up about 13 percent over last year, to 0.75 percent. Subprime auto delinquencies, at 3.19 percent, are also up for three months running.
Thus prices will continue their downward slide until … well until the inventory goes back to normal. Any attempt to pinpoint that date would just be a bad guess on my part.
From a policy standpoint, you would think that if the Realtors really wanted to help first time home buyers they would just let the market continue to fall. The further prices decline housing will be more affordable, and, assuming mortgage rates stay low, that will attract more people to the market, thus sopping up excess inventory.
These buyers using the $8,000 credit are being played for saps, All they are doing is exchanging $8,000 for higher prices which will be far more expensive to them by amortizing the extra cost over a 30 year mortgage. If prices are already down 15% this year, let it drop another 15% and they will be far better off than if the government extended the credit. If the median home price is now $178,400, then another, say, 10% drop would mean they would pay $17, 800 less. Do the math.
It’s another example of the Law of Unintended Consequences and bad Keynesian economics.
Jeff-
What’s next? Cash for refrigerators — http://www.businessweek.com/bwdaily/dnflash/content/aug2009/db20090821_304909.htm
If de Tocqueville can be believed, it looks like we’ve entered the terminal decline of the Republic:
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
de Tocqueville could have added that American capitalism will endure until the day the “capitalists” discover that they can bribe congress to pay the public to buy their goods.
Lloyd, wonderful quote from de Tocqueville. And thanks for “Cash for Refrigerators.” Good points.
At the risk of sounding histrionic, I really think the Republic’s on the edge of the precipice. Most of the people in my casual circle think the gov’t's giving away freebies is a good idea. Why? Because they like freebies. When I ask people how they think the gov’t will pay for this party I get the “What kind of question is that?” look. Then there’s the “If the gov’t can bail out the bankers so they can give themselves million dollar bonuses, I deserve a new house, car and refrigerator” line of reasoning.
You know Lloyd, it is discouraging. But that’s why I write this blog to show people there is another way of looking at things. Your comment from de Toqueville was very perceptive because politicians buy votes. The problem is, is when the people in the chow line outnumber those who are serving the dinner. This problem started with FDR and when the Supreme Court started believing in the “Living Constitution” as I was taught in college and law school (my profs were all old New Dealers). When we end up with a pure democracy without a Bill of Rights protecting us, then it is an uphill struggle. The lure of “free” is great. But, as we say, there ain’t no thing such as a free lunch (Taanstaafl).
An amusing P.S. to the ‘Cash 4 Clunkers’ program: 60+% of the new cars sold were of Asian origin. C4C was originally conceived as a means of helping out Detroit, the UAW.
http://www.nytimes.com/2009/08/27/business/27clunkers.html?_r=1&hpw
Jeff I have finally worked my way through the subscription process . I have been reading for many months and I am now ready to go public. From reading most of your observations your readers would never believe that you really had spent significant time in the real world trenches of the finance and real estate development. That history enhances your credibility, don’t be ashamed. You comments that buyers using the $8,000 tax credit are being played for saps clearly shows you have moved to the dark side. Your former brethern ,at least some of them, are not l evil money grubbing morons. Most of us are like the mouse who says I don’t want more cheese I just want my head out of the trap. we need all the help we can get . Anything that reduces the inventory is helpful. What if interest rates begin to rise , as you have predicted. The tax credit will be gone and consumers have missed the boat
I do love your blog you are doing a great job
Bry:
Yes, I did go to the Dark Side. I have not hid my sordid past since I reveal all on my “About” page (very top of blog). But, in response to your seeking government alms, it all depends on who you wish to benefit: the consumer or the developer, and that’s a political decision, not an economic one. The market has spoken, and buyers want lower prices. Only the market can tell us where the floor is, not the government. You can’t assume the government knows better than the market which, as you know, is the result of decisions of millions of people versus the decisions of a few in D.C.
Thanks for reading and thanks for subscribing.
In the above article you noted that apparently 40% of first time buyers would not have purchased without the tax credit. As the article continues you note that 40% of all sales are driven by government credits. To my knowledge first time buyer sales represent a relatively small percentage of total sales.
With that glaring error as a basis you continue to create a mathematical comparison to a hypothetical sale which may never occur. Your basis that prices will continue to drop 15% per year is totally unsupported foundation.
I am of the mind that at this time the reduction of housing inventory is the primary objective. The market needs confidence. The buyers need to gain confidence that the market is improving then more buyers will join. Consumer spending is enhanced as builders and suppliers get busy. Local economies are strengthened as brokers and lenders begin to get paychecks. Banks are strengthened as they relieve themselves of foreclosed properties. I am going on to read some other articles . regards
Bry:
Not sure where you are going here.
The 40% statistic came from the NAR. There is a link to the source of that data, so I believe it is real.
Also, I didn’t say that prices would decline 15%; that was a hypothetical example to demonstrate my point that if prices are falling, why jump in now? It is clear that prices are still falling in many areas, and I believe that will continue nationally, even though some areas are showing growth. Since inventories are still very high, it is not a stretch to say that they will continue to fall. The market will determine when things hit bottom and I can’t predict when that will happen. Supply and demand and all that. The market will recover only when people make a decision to buy a home based on market-based decisions, not government political decisions.
I would disagree with your belief that government stimulus will result in any lasting impact. I believe that the impact of the $8,000 credit will be short lived. We can disagree on the theory of Keynesian stimulus, but, as I have constantly pointed out, there is no example where such stimulus actually worked.
Second, why does the government encourage people to buy homes and incur debt when we are starting to unwind the debt from the credit boom? I believe, and the numbers bear me out, that people need to save and restrict spending, and that is exactly what they are doing and that is what will bring about a recovery.
Thanks for the comment!
Karl Denninger weighs in:
http://market-ticker.denninger.net/archives/1399-Making-Foreclosures-One-At-A-Time.html
There are going to be some people who wish they hadn’t jumped at the money.
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