House Prices Now Boring

Once, in a now faintly remembered time, we were obsessed with house prices. Even as recently as a year ago, such obscure arcana as the Case-Shiller Home Price Index was closely followed. Looking back it is hard toPerce_cliff_house understand why. It was almost as if we thought that houses were a significant slice of our national wealth, that a change in their value might actually effect consumer sentiment and spending, and that a sharp drop in house prices, of all things, had set off the Great Recession. As if.

Of course, now we know that the Great Recession was started by a mid-level employee in the London office of Goldman Sachs.

Yesterday S&P released the monthly Case-Shiller numbers for February. It did not get a lot of coverage. True, that may be partially attributed to sharing a business news cycle with surprisingly strong consumer sentiment numbers, a turn for the worse in the Greek Crisis, and the ritual sacrifice of Goldman execs to appease the mid-term election gods. But it is hard to escape the conclusion that we have simply lost interest in house prices.

The numbers released were worse than expected, although maybe not alarmingly so. The non-seasonally adjusted 20 city index was down –0.9% for February 2010. The seasonally adjusted index number was close to flat, down –0.1%, and its elder sister the 10 city index was just on the other side of zero at +0.1%.

A person might take solace in those seasonally adjusted versions, which have been creeping up over the past few months while the unadjusted ones have been easing down, but for the fact that S&P is now backing off on its support of those figures. As reported in The New York Times (on page 3 of the business section) S&P now thinks the seasonal adjustment mechanism is broken. Prof. Case, the numbers guy on the original team, says that the size of the seasonal adjustment has now got him “spooked.” S&P suggests that we evaluate the indexes on an annual basis, that is, today’s reading versus a year ago.

And that is probably the sunniest way to look at the numbers just now. February 2010 was up on February 2009, for the first 12-month gain in house prices since 2006. That is not exactly a surprise. The 11-month price change to January was +1.5%, so it would have had to have been a particularly nasty February to make the year number negative. And the 11-month return through February is now +2.8%, so I am not going out on a limb when I say that I am sure next month’s annual number will be positive too.

Only a total wet blanket would point out that the year to February 2010 gain in house prices of +0.6% compares unfavorably with inflation over the same period, which came in at +1.8%.

My outlook on house prices has not changed very much over the past year or two, but compared to everybody else I seem to have gone from optimist to pessimist. I think the bubble is done. I expect boring house prices movements for the foreseeable future, by which I mean something like the long-term trend of tracking inflation. (I also expect inflation to rear its ugly head soon, but then I’ve been expecting that for a while.)

Amongst the very few of us that still care enough about house prices to have an opinion, there is a subset that is bearish on the grounds that the modest uplift (floor, really) we have seen in housing prices over the past year has been caused by government subsidies for home buyers. Since those freebies will, finally, run out in a few days, there is big trouble ahead.

I do not agree, and the best counter argument I can offer is the growing consensus that the subsidies were a pointless waste without meaningful economic effect. Even the Times, which generally bends over backward to praise government programs in general, and ones like this from this administration in particular, says so. They did bravely title Monday’s article Home Tax Credit Called Successful, but Costly, but the text tells us that most of the money went to people who would have bought a house anyway. They cite “real estate agents” as believing that 75% of credit recipients fell into this category. If a more scientific study were done (don’t hold your breath) I think it would show the true percentage to be even higher.

But even at 75% waste, that is only 450,000 households who bought (or bought sooner) because of the subsidy.  There were 5.1 million existing home sales in 2009.

What’s more, although the scheme started out as exclusively for first-time buyers, that kept too many voters from getting their slice of pork. So it was expanded last November to include people who already owned homes. And in case you don’t get the joke, let me spell it out: a family that moves from one house to another may help increase demand when they buy the new place, but they undo the benefit when they sell their old one.

And that’s not the really funny part. From the Times:

The first two phases of the credit did not require taxpayers to prove that they had actually bought a house. The Treasury’s inspector general found in October 2009 that the I.R.S. had allowed $139 million in credits to people who had not yet bought homes, and $479 million to taxpayers who were not first-time buyers.

The I.R.S. resisted proposals to require proof that a home had been bought, with officials saying that the additional paperwork would be too onerous because it would prevent returns from being filed electronically.

For whom was the “additional paperwork” too onerous? The taxpayer who would be paid $8,000 to fill it out? Not likely. Turns out, actually checking to see if a taxpayer is really entitled to an $8,000 credit is just too hard for the IRS. Poor fellas.


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