Home sales may dry up in December

BusinessWeek's Hot Property blog warns that home sales will dry up when the $8,000 tax credit goes away:

Just when the home building industry seemed to be bouncing back, news from California raises troubling questions. The California Building Industry Association says its members reported a significant drop in traffic to their developments in July because the state stopped taking applications for a $10,000 tax credit for new home buyers.

The $10,000 credit was authorized by the state legislature last February as a way to jump start California construction jobs. The credit, coupled with the $8,000 federal new home buyer credit, had been a big reason why builders in California saw a jump in sales this past spring.

Now with the initial funding exhausted, buyers are less eager. “Activity stopped as quickly as it started, which is bad news for housing and the broader economy,” says Robert Rivinius, the builder association’s president. ...

That the expiration of the state tax credits already seems to be dampening buyer enthusiasm in California doesn’t bode well for the home building, real estate sales or auto manufacturing industries nationwide. As the initial boost from government incentives ends, those industries could post poor sales numbers again. ...

“The federal tax credit for first-time buyers played a critical role in the purchase decision of many buyers,” says California Association of Realtors President James Liptak. “Nearly 40 percent of first-time buyers said they would not have purchased a home if the tax credit was not offered.”

Has housing hit bottom?

The arguments for and against a bottom, by USC professor Richard Green:

Everybody wants to know if we have hit bottom. There are three indicators suggesting we have—and three suggesting not. The good: prices in many markets have fallen below replacement cost (which is a pretty robust fundamental in the absence of population declines). Morris Davis at Wisconsin has shown that rent to price ratios have returned to be more in line with long term ratios, and given how low mortgage rates are, this is comforting. And resale inventories in California have dropped to under 4 months.

On the down side, we may have a lot of foreclosed houses coming at us in the next year. The employment picture is still atrocious. And if rents keep falling, prices will follow.

I would also guess that the first-time homebuyer tax credit is time-shifting sales, rather than raising them for the long term, but we shall see.

It's funny how rising asset prices are always "good" and falling prices are always "bad". More people need to study Warren Buffett's investment philosophy, because he considers low prices to be "good" and high prices to be "bad". As Warren would say, "The price you pay determines your rate of return."

Housing has likely bottomed. New bubble forming?

I hate to be the bearer of bad news, but as I'm sure you're already aware, almost all data seems to be indicating a bottom in housing.

Despite the claims of the Calculated Risk blog (which I have echoed), the bottom appears to have occurred simultaneously in permits, starts, sales, and prices.

The bottom also appears to have occurred simultaneously in nearly all parts of the country. The S&P/Case-Shiller seasonally-adjusted home price index shows month-over-month increases in price for 15 of the 20 metropolitan areas it tracks, including here in the Washington, DC area.

The bottom in housing is coinciding with the bottom of the economic cycle (i.e. the end of the recession).

Housing permits:


Housing starts:


Housing prices (via Rebecca Wilder):

There is a somewhat strong possibility that the $8,000 first-time home buyer tax credit, which ends November 30, is creating a false housing bottom.

By transferring wealth from some taxpayers to others (apparently a Democratic Party specialty), the tax credit is creating artificial housing demand. As confirmation of the effect of this wealth transfer, we can observe a similar pattern in auto sales due to the Cash For Clunkers program. Cash For Clunkers artificially stimulated auto sales by rewarding gas guzzler owners with a $3,500-$4,500 tax credit to buy slightly less gas guzzling vehicles. (We fuel-efficient car owners get to pay the tab via our taxes.)

Low mortgage rates are also stimulating housing demand. Mortgage rates today are lower than they were earlier in this decade when they helped fuel the housing bubble. These historically low mortgage rates are likely to remain low for some time, as the Fed and Treasury do everything they can to strengthen the economy.

Just as the Fed happily encouraged a housing bubble to stimulate the economy after the 2001 bubble burst-caused recession, I fear it will happily encourage another bubble to stimulate the economy after this one. As the stock market demonstrated earlier this decade, a new bubble can form before the previous one completely deflates.

Stock market double-bubble:


The big question is, what is the primary driver of current housing activity? Is it the $8,000 tax credit, which will go away soon, or is it the historically low interest rates, which won't?

The Cash For Clunkers program, and the fact that housing activity is much stronger at the low end of the market, suggest that perhaps the $8,000 tax credit is the primary driver. Low mortgage rates should equally encourage sales of all conforming mortgages, regardless of price. By contrast, the tax credit should heavily favor low-end sales. This is because an $8,000 tax credit is 10% of the cost of an $80,000 house, but only 2% of the cost of a $400,000 house. The fact that new home buyers are currently making up a disproportionately large percentage of home buyers is further evidence of the first-time home buyer tax credit's effect.

That said, as the tax credit stimulates housing activity and prices, it may change market psychology. Rising prices and low mortgage rates may then encourage others to jump on the bandwagon, causing yet another housing bubble before the current one has fully deflated. I can't predict the future, but this is a possibility that worries me.

What could prevent such a scenario? If Nouriel Roubini's warning that the economy may experience a double-dip recession comes to pass, then that will likely knock the wind out of the housing market a second time. However, the upward sloping Treasury yield curve—the most reliable and far-sighted leading economic indicator—suggests this will not happen.

Rebecca Wilder expects home sales to surge in the next few months as the end of the tax credit nears. Due to data lag, we likely won't know until spring 2010 whether home prices continue falling after the tax credit expires.

Case Shiller Price Index Up

"The prices of single-family homes in 20 major cities rose a seasonally adjusted 1.4% in June, the second increase in a row after falling every month for three years, according to the Case-Shiller home price index released Tuesday by Standard & Poor's." (Market Watch)

Fully 18 of 20 markets in the Case Shiller Home Price Index showed a rise in prices, demonstrating that the trend is broad-based. Only Las Vegas and Detroit saw declining overall prices in June. Nevertheless, on a year-over-year basis prices still are off by a considerable margin, 15.1% for the Composite-10 index and 15.4% for the Composite-20. (Seeking Alpha)

In the Washington, DC area prices were up 2.2% (seasonally adjusted) in June compared to May; Annually prices are down 11.8%.

For more info:

• Case Shiller Home Price Index (Standard & Poor's)
• Case-Shiller House Price Index Increases in June (Calculated Risk)

More bubbles to come

"Helicopter" Ben Bernanke, a guy who cannot recognize asset bubbles, is to be reappointed Chairman of the Federal Reserve. From The Wall Street Journal:

President Barack Obama will announce the nomination of Ben Bernanke to a second term as Federal Reserve chairman on Tuesday, opting for continuity in U.S. economic policy despite criticism in Congress of the low-key central banker's frantic efforts to rescue the financial system.

Mr. Obama's decision had become a subject of growing speculation and uncertainty in financial markets and in Washington policy circles.

The president called the Fed chairman to the Oval Office this past Wednesday to offer him another four-year term. Mr. Bernanke then flew off to Wyoming where he gave a defense of his controversial policies at the Fed's annual meetings in Jackson Hole. Mr. Obama left for Martha's Vineyard, Mass., where he will deliver the news Tuesday with Mr. Bernanke at his side.

Mr. Bernanke is seen by supporters inside the administration and in markets as a creative and steady hand who helped to keep the financial chaos, which became especially dangerous in the past year, from becoming much worse. White House chief of staff Rahm Emanuel said the president credits Mr. Bernanke for "pulling the economy back from the brink of depression."

My Bernanke poem:

Real estate was
The way to get rich.
Just buy a home
And give it a flip.

If you bought more house
Than you can afford,
Helicopter Ben
Will dump cash your door.

He's Helicopter, Helicopter,
Helicopter Ben,
The money-throwing man
Who works at the Fed.

Money from the clouds,
Money from the sky,
Manna from heaven,
Thank that helicopter guy.

Correcting two related housing bubble myths

A number of times I have heard journalists—who helped cheer-lead the housing bubble and who regard any price correction as a bad thing—falsely claim that the housing bubble began around 2003-2004. After all, that's when the bulk of the sub-prime lending began so that must be when the bubble began. A look at the inflation-adjusted data, however, shows that the bubble began growing in 1998 and we were clearly in mild bubble territory by 2000.

The extensive sub-prime lending that occurred in the middle of this decade was therefore a result of, not a cause of, the housing bubble. That said, the extensive sub-prime lending allowed the bubble to last longer and grow bigger than it otherwise would have.


In summary, the bubble did not begin in 2004 and sub-prime lending did not cause the bubble.

An economic recovery forecast

The Economist makes its prediction for the shape of the economic recovery:

A gloomy U with a long, flat bottom of weak growth is the likeliest shape of the next few years.

They also have a discussion about the housing market here.

Urban planners vs. "suburban sprawl"

Cato Institute Senior Fellow Randal O'Toole discusses urban planning and suburban sprawl.

Existing home sales are up, but...

From CNBC's Diana Olick:

Just like in retail, where the big bargain stores are showing gains, only the low end of the housing market is moving. ... I spoke with Spencer Rascoff of Zillow.com today, who claims, "this is not a real recovery." Higher sales on one end of the market do not a full recovery make.

1 in 8 mortgage borrowers behind on their mortgage

More mortgage borrowers are falling behind:

More than one in every eight homeowners with a mortgage was behind on home loan payments or in some stage of foreclosure at the end of the second quarter, as mounting unemployment aggravated the housing crisis, the Mortgage Bankers Association said on Thursday. ...

Jay Brinkmann, chief economist at the MBA, said signs were growing that mortgage performance is being affected more by unemployment than by the structure of risky home loans, indicating a new stage in the foreclosure crisis...

While the proportion of foreclosures started on borrowers with subprime adjustable-rate mortgages fell dramatically in the second quarter, foreclosure starts on traditional prime fixed-rate loans saw a dramatic increase.