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.


  • By ctreit, April 28, 2010 @ 1:16 pm

    Boring is good in this context. Why would anybody want to speculate with his roof over his head?

    On a different note, I suppose I am not with the “consensus” because I am not so sure that ‘the subsidies were a pointless waste without meaningful economic effect.’ It is difficult to assess what role these subsidies played in stabilizing the housing market. Maybe it was just psychological, which is hard to measure. Besides, we cannot turn back the wheel of time, apply different policies, and then see which one would have worked better. We are always smarter after the fact, but not by much. Economists still argue whether FDR’s policies helped end the Great Depression.

  • By jim, April 28, 2010 @ 2:53 pm

    No news is good news… ?

    The IRS bit doesn’t make much sense. Either the IRS is cray or the reporting is missing something.

    Especially this bit:

    “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.”

    You can electronically file basically any return now. The IRS doesn’t really require ‘proof’ up front to do any kind of return. So this isn’t really any different then claiming you lost money on a stock sale or claiming you made a charity deduction. The ‘proof’ only comes into play if you actually get audited.

    It would be pretty simple for closing agents to send 1099′s for anyone doing a home purchase.

  • By Nathan, April 28, 2010 @ 3:50 pm

    I seem to be an interesting case study; I bought a condo as a first time homebuyer last fall, and the credit was the factor that convinced me to do so. I also had my refund flagged and had to produce more proof that I had in fact purchased a home before my credit was finally allotted.

    I have a few friends that also bought because of the credit as well. My perception of the impact it has had on the housing market is such that I’m a little concerned about prices dropping by a sizable fraction of the 8k after the credit expires. Granted, that’s based on anecdotes rather than hard data.

  • By Josh Yeager, April 28, 2010 @ 4:11 pm

    My wife and I bought our first house last year; we were planning to do it either way, but of course we advantage of the credit (pork is great when you’re the one who gets it).

    We had to include a copy of our HUD-1 when we filed our 2009 taxes, and it definitely delayed the processing. We filed in early February and didn’t get our refund check until early April. So, I guess the IRS decided that they needed to be more careful about processing the credit this year.

  • By Grey, April 28, 2010 @ 6:06 pm

    Real estate agents are 99% clueless.

    The problem with “would have bought anyway” is that those purchases would have been spread out over a longer duration, rather than compressed by the deadline of an expiring credit. Regardless, they would not have had $8,000 anyway, so something is being stimulated by this credit, even if not the house price (furniture or carpentry?).

    And something is being hit on the backside. If renters are now buyers, then what has happened to rents?

    Also, consider that not all sellers would have sold anyway. I know people who were eager to list their homes for sale due to the credit.

    I feel like this whole policy has created short-term distortion in several areas, but they will even out long-term, if the market is allowed to function freely in the future. Of course there is more gov debt for the babies to repay.

  • By Nick, April 29, 2010 @ 9:22 am

    I bought a house last year. We were originally planning to save for 2-3 years before buying, though, and the tax credit made it feasible to buy early.

    Although we’ve only actually spent $1,000 of it so far.

  • By Craig, April 29, 2010 @ 9:51 am

    Housing is still above-trend; a slow bleeding of the ill humours in real terms that shows a nominal increase in price is just about the best thing we could hope for. May such a trend continue for the next decade. (But I don’t think we’ll be that lucky: rising interest rates will do considerable damage to prices.)

    I did not favor the first-time credit, but I think you’re a bit harsh in your assessment–especially with respect to the expansion to existing home owners. As an exercise in throwing sand under the keel of a sinking boat, it had some merit. The most visible sign of our lunatic housing bubble was the construction of far too many very large houses. Expansion of the credit, perhaps, lesseed the Blight of the McMansions by encouraging starter home couples to spread out a little bit.

    But, yeah, even as I’m writing that defense, I don’t know if my heart is in it. I prefer “face the music” strategies to “reinflate the bubble” ones. I would have been much happier using that money on some kind of principal-modification scheme rather than artificial price-stimulation.

    And for that matter, I would have let AIG fail but honored their debts to corporations in exchange for common equity, and I would have sent the FDIC to kick down the doors of BoA and Citi a year ago. So maybe its better to have cooler heads in charge?

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