Monday, October 26, 2009

Government intervention added 5% to home prices

Here's a summary of the analysis from Goldman Sachs:
Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday. ...

But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

Federal government policies encouraging loan mods have reduced the supply of homes on the market temporarily because it takes months for loan servicers (the firms that collect mortgage payments) to figure out which borrowers qualify. ...

Goldman estimates the tax credit has boosted sales by 200,000 units. ...

Mammoth purchases of mortgage securities by the Federal Reserve appear to have held home mortgage rates about 0.30 percentage point lower than they would have been, Goldman says. Those purchases are due to be phased out in next year’s first quarter.
Thanks to Kahner for pointing out Calculated Risk's response:
Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.
Forget Wall Street, I think Congress needs a salary cut.

18 comments:

  1. This doesn't surprise me, but it does surprise me that the majority of Realtors want to extend the tax credit including the National Association of Realtors, who should not better.

    Realtor's should want the economy has a whole to recover. This would be better for business overall.

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  2. Your typical realtor is far too stupid to understand how bad this credit is for the economy. Their less-than-room-temperature IQ leads them to believe only what NAR tells them, which is "more sales + higher prices = GOOD". These idiots seem to believe that the problem is that it's no longer 2006, not that the bubble ever happened to begin with. Realtors need to be drug out in the street, tarred, and feathered.

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  3. Agree- realtwhores in general are uninformed morons chasing bling-bling. They see money printing as the solution to our current economic woes. Exceptions do exist, but they are uncommon.

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  4. As a REALTOR the rebate has done nothing for me. The only extension should be to the armed forces who have been stationed overseas. Otherwise let the program die. They're just now starting to discover how much fraud was involved in this program. Reward the people who pay their bills not the ones who can't pay attention.

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  5. I would just like to say that the Realtors who read this blog are fine, upstanding, intelligent people. It's the Realtors who don't read this blog that are the problem. ;-)

    Honestly, I get the sense that the Realtors who comment on this blog today are of a different character than the bubble-denying ones who repeatedly criticized us a few years ago.

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  6. he first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.


    If the first time homebuyers credit propped prices by 2.5%, then that's an aggregate increase in residential home valuations of approximately $500B, at a taxpayer cost of less than $20B. Not bad.

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  7. z, and when aggregate valuations drop another trillion dollars, where will that 20 billion have gotten us? That money went to spur speculative and leveraged buying and a shift of future demand to the present. I guess you would believe there's such a thing as a free lunch too.

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  8. Kevin, the credit would have to be made permanent of course, along with the other permanent real estate value pumping tax policies. In any case, the credit has bought a year's relief from falling values, maybe another year and with any luck inflation will kick in and prevent further nominal value drops.

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  9. How quickly everyone forgets just how close we were to the financial collapse of the US economy. Too many of this blog's audience believes that their ability to buy a cheap house (or even reasonably priced one equal to its true value) is in the best interests of the country at this particular moment. NEWSFLASH...It's not! (yet)

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  10. Of course cheap housing is beneficial to the country. We would never have had these problems if it weren't for prices getting out of control high. They need to fall back to earth for our economy to have any chance of surviving. This is delaying the inevitable and is extremely wasteful of tax dollars.

    z, the credit is terrible. The end result will be more people underwater. You cannot make a sound economic justification for it, you just can't. These RE pumping policies just waste good money chasing bad money and driving short-term speculative markets. The bubble isn't the solution, it's the problem.

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  11. "with any luck inflation will kick in"

    yeah we could only be so lucky to see purchasing power drop. I for one dream of the day that a week of work buys a gallon of milk here in the US.

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  12. "They (home prices) need to fall back to earth for our economy to have any chance of surviving...the credit is terrible. The end result will be more people underwater. You cannot make a sound economic justification for it"

    You do realize you are talking out of both sides of your mouth and from another undisclosed location as well. The justification for policies that aim to stabilize the real estate market is to prevent even greater numbers of home owners finding themselves underwater. Creating a floor to the housing market bust, even if it's artificial delays the inevitable outcome in which home prices are aligned with their real values and this is a good thing for the economy. It is far more healthy for home owners to be able to sell their homes to buyers rather than have them fall into foreclosure. In many markets, selling your home is just not possible. The first-time homebuyer tax credit is the one Republican idea that has proven to have merit in stabilizing the economy.

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  13. Of course that's a very uneven 5%. Probably boosts the lower end alot because that 8k is being used as a downpayment and so gets leveraged. And the boost to the upper end is more moderate since most are not first time home buyers. --Jim A

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  14. "The justification for policies that aim to stabilize the real estate market is to prevent even greater numbers of home owners finding themselves underwater. Creating a floor to the housing market bust, even if it's artificial delays the inevitable outcome in which home prices are aligned with their real values and this is a good thing for the economy"

    It's futile. The argument is akin to asking for the housing bubble to come back. If the worry is about underwater homeowners walking away, your concern then should be on the lax laws that allow them to walk without recourse, not propping up bubble prices. This is horrible for the economy.

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  15. wow, my first hat tip. w00t!

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  16. "It's futile. The argument is akin to asking for the housing bubble to come back. If the worry is about underwater homeowners walking away, your concern then should be on the lax laws that allow them to walk without recourse, not propping up bubble prices. This is horrible for the economy."

    You can't argue that some action will bring bubble prices back and in the same breath suggest the same action is propping up bubble prices. The fact is, bubble prices are gone and it appears a floor has been reached in declining home prices for most markets. That this floor may not be as low as many were hoping or whether it is precisely where home prices intersect with their true value is irrelevant to the aims of economic stability. As for being "horrible for the economy," perhaps you haven't yet learned that GDP grew by 3.5% buoyed by home and car purchases thus ending the recession and economic freefall that began over a year ago.

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  17. "You can't argue that some action will bring bubble prices back and in the same breath suggest the same action is propping up bubble prices."

    Yes, those two things are not only NOT mutually exclusive, they are in fact the same. I don't know where your disconnect occurred, but I can certainly say both of these things while not being in the least bit contradictory.

    "The fact is, bubble prices are gone and it appears a floor has been reached in declining home prices for most markets."

    That's not a fact, and you couldn't find one economist outside of NAR that would agree with it.

    You're not very knowledgeable about fundamental housing values. While nobody knows exactly where the bottom is, I don't think there's a single market out there you can argue has over-corrected, much less all of them. That's just an asinine statement.

    The real bottom to the housing market may be lower than you want it to be, but that's the fault of ignorance. It took this buyer's bribe to get markets to bottom out. It's not a coincidence it happened right when the credit started. Nor will it be a shock when prices continue to drop in the future. All it does is trap new buyers in underwater homes for the long term.

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  18. Not surprising at all..interesting discussion here...a very contextual one too.

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