House Prices Bottomed in April

Another last Tuesday, another positive report on the S&P Case-Shiller Home Price Index. The 20-city composite was up 1.2% in August, putting it 4.85% above its April low. That’s a long long way from the heights of 2006 (it’s now 29% below the July 2006 peak) but it’s increasingly looking like this is not just a blip in the data.

17 of the 20 cities recorded gains. Charlotte, Cleveland, and Las Vegas were the only unfortunates. Charlotte and Cleveland don’t have much to worry about, they were both up more in July than they were down in August, and overall they saw relatively modest declines in the bust.

Vegas, on the other hand, can’t seem to snap its losing streak. This makes three solid years of down months. The only consolation seems to be that Sin City was down only 0.3% in August, breaking up two years of monthly losses greater than 1%. It’s now down 55% from the peak. Yikes.

With the Vegas-excepted upswing now in its fourth month, the question is no longer have we found a bottom in house prices but is this bottom the real, long term, thing or just a temporary respite.

Bloomberg has a nice article today summarizing the bull and bear cases for housing. The bull case is relatively obvious, that the storm is over, prices are compellingly low, and potential buyers no longer think waiting for a better price is a good idea.

The bear case is that this is a false bottom created by government policy, particularly the first time home buyer credit. The credit expires in a month, implying that this party will come to an abrupt end soon.

Of course, the $8,000 home buyer credit is as popular as you would expect a government giveaway of cash to be, enthusiastically embraced by those who get the subsidy. But it is not clear how much it is affecting the price of houses. To make a dent in that it would have to induce people who would otherwise not buy a house to do so and/or get them to pay more for it.

If the credit were driving the run up in house prices you would see a skew to the lower end of the market. In as much as $8K changes behavior around a $200K property, it ought to have less effect on a $500K one. And yet the data does not show this. S&P publishes "tiered" price indexes, that is, indexes broken down into high, middle, and low priced houses, for 16 of the 20 cities in the composite. And in 9 of those 16, high priced houses have outperformed low priced ones.

I am a bull here. I think this spring really was the bottom. The rate of increase we have seen over the past four months (it annualizes at 15.26%) is clearly not sustainable, but this isn’t a false dawn. The dead cat bounce may not be over, the correction from overshooting downwards in the Great Panic phase of the Great Recession may run for another month or two, but I expect that soon we will see prices settle down to growing by inflation only.

Which is to say that in nominal terms the house prices we saw in April were as low as we are likely to ever see again. The same is true for stocks, come to think of it.

Government, Housing | Frank Curmudgeon | October 27, 2009 10:59 am

6 Comments

By Matt, October 27, 2009 @ 11:54 am

I wouldn’t rule out the effect of the tax credit. I have 35 tenants in townhomes worth about 100k each, and 5 bought or are in the process of buying. Another 2-3 were testing the water and couldn’t/didn’t buy. Of course, this community also includes singles living with roommates, retirees, evictions, students, etc. Looking at my data set, it’s a big percentage of the townhome renters with a job and decent credit.

I wish I had such data on the higher priced homes to disprove your point, because I suspect it’s moving the needle there too. Realtors are forking tax credit signs into some pretty high value lawns – down the street, there’s a $600k listing with an $8k lawn sign. Don’t forget that the credit is also valid for those who haven’t owned in the last 3 years: many of those relocating from the snowy north who chose to rent first are eligible.

Feel free to also note that the government isn’t renting out the vacancies created by the buyer’s credit.
By Jon @capitalistmaven.com, October 28, 2009 @ 9:30 am

I have to agree with Matt. The problem with real estate is it’s so easy to spin. The real estate market involves significantly more emotion than the markets for other commodities. I think that the first time homebuyer’s credit is going to turn into a cash for clunkers and it’s going to be a _very_ slow winter for housing. With the employment picture not improving, more houses are going to be coming to market during this winter’s extremely low demand. Throw in a little interest rate hike and things could get really ugly, really fast.
By Craig, October 28, 2009 @ 10:43 am

I agree that interest rates will have to come up sooner or later, and this will hurt home prices–perhaps a great deal. Then, too, we are not out of the woods on foreclosures–not by a long shot–and there is still a great deal of “paper value” in the housing stock to be burned up.

I’m surprised and impressed that housing prices have rebounded as well as they have, but we must acknowledge that we’re seeing in part the results of a massive and sustained governemnt effort to prop prices up and thereby keep the banks solvent. Sooner or later, the punchbowl will be removed.

With age, I become ever more convinced that reversion to the mean is one of the most powerful forces in the world. Housing prices were probably near their long-term trend when the market bottomed. Now that they’ve rebounded, they’re above trend again. That, plus the factors I’ve alredy mentioned, makes me think that real estate of all kinds is unlikely to do very well in the coming years.

In fact, what _does_ look good right now? Stocks are back up into frothy territory (I bought at the bottom…but then, I also bought at the top), bonds are going to get obliterated when interest rates come back up…I just think we’re in for one hell of a hangover in the twenty-teens.
By Frank Curmudgeon, October 28, 2009 @ 10:01 pm

I will persist in thinking the home buyer credit is not a big driver of this upswing. I think prices a third below what they were three years ago and interest rates that are approximately as low as anybody can remember is what is getting people out and buying. The check from the government is icing. And it’s now looking like they will extend the free money party to the spring anyway.
By Hibryd, October 29, 2009 @ 6:18 pm

I think the credit gooses demand a little. Speaking as a buyer, the real problem is on the supply end. There’s not enough for sale. This lies in the lap of the banks, and their foreclosure (or lack of foreclosure) of homes in default. 13% of all mortgages in this country are either behind or already in foreclosure. That translates to a “for sale” sign outside of one of every twenty houses in all. But the banks (and the government) are kicking the can down the road with moratoriums (which end eventually), modifications (which usually fail), and often just not foreclosing on people, even if they haven’t paid a dime in 12 months.

I used to think it was simple math, that the record number of NODs would eventually translate to record numbers of foreclosures. But so far it hasn’t. I don’t know if they’re be able to trickle foreclosures out over the next 5 years, or if the dam will burst eventually. But I’m getting tired of this attitude that no price is too high to “save” the housing market.
By Frank Curmudgeon, November 2, 2009 @ 11:43 am

“There’s not enough for sale.” is a sentence that speaks volumes.

I think the effect of government action to stop foreclosures is massively exaggerated. Mostly, the banks are laughably overwhelmed by the volume of foreclosures and have had no choice but to grind away slowly. I don’t think there is a dam to break. There may be an effect whereby now that prices are stable to up banks are in less of a rush to cash out, but by and large I think they are working their way through this almost as fast as they can. Most of them really really need the cash.

There is also a virtuous circle here with regard to house prices and foreclosures. Rising house prices reduce the supply of new foreclosures, since more houses can be sold for more than is owed, which reduces the downward pressure on the market of foreclosures being auctioned, which helps prices.

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