HousingStorm.com

BusinessWeek has done some great reporting throughout this banking/real estate crisis. But, this latest article is flat out wrong.

From BusinessWeek Housing’s Hidden Strength

Homebuilders and Realtors are lobbying Congress to keep alive the tax credit for home purchases and to make it available to more buyers. They say the $8,000 credit—which is for people who have not owned a home for three years or more and expires after Nov. 30—has boosted demand for low-priced homes, many of them foreclosed and in need of repair. But, they maintain, it has done nothing for the “move-up” market, let alone the luxury segment. Many say the housing market will falter unless the credit is extended, doubled in value, and given to any buyer. “The giddiness we see out there [about a recovery] is without merit,” says Richard A. Smith, chief executive officer of Parsipanny (N.J.)-based Realogy, the parent of Century 21, ERA, Coldwell Banker, and Sotheby’s International Realty.

I can’t believe I’m taking the same side of the argument as the Realtor.

But some little-noticed data indicate there’s more strength in housing than the industry recognizes. Prices have stabilized, and even appreciated, in the middle- and high-priced segments of the market in many cities, not just in the low-priced segment that is most directly helped by the home-buyer tax credit. That’s according to the Standard & Poor’s/Case-Shiller tiered price indexes for 17 metro areas, which were released on Aug. 25 but received relatively little publicity.

Seasonally adjusted prices rose in each segment of the market (low-, medium-, and high-priced) from May to June in cities including Boston, Washington, and Chicago. High-end prices went up even in hard-hit Phoenix. Las Vegas, where foreclosures are running extremely high, is the only one of the 17 metro areas that saw a price drop in all three price categories in June.

“The tiers are really revealing,” says economist Karl E. Case of Wellesley College, who developed the index with Yale University economist Robert J. Shiller. “[The rising prices] can’t be just first-time buyers.” While prices could fall after the expiration of the tax credit, says Case, “It’s not a knockout blow if the expansion is broad-based.”

Prices held steady the last few months NOT because of a healthy, organic recovery, but from the influence of artificial and temporary forces. Demand was increased from artificially-low interest rates, temporary tax credits, and typical sensationally. Supply was decreased by various foreclosure moratoriums that have been in effect since August of 2008. And, there are very few “normal” sellers in this market. Increase demand and lowered supply, mixed with high season, higher stock market, and grumblings of a recovery…it shouldn’t surprise anyone that prices held firm.

And, it shouldn’t surprise anyone when prices begin to fall again.

Those arguing that housing needs government life support say most of the sales action is in foreclosed homes, which tend to be super-cheap and are being bought as starter homes or investment properties. But a National Association of Realtors member survey seems to contradict that theory. Even as home sales rose, the share of first-time buyers dropped from 53% in March to 30% in July.

There are only so many first-time buyers in any given period of time. Even 30% is too high.

As for the argument that luxury is dead, Toll Brothers (TOL), the nation’s largest luxury homebuilder, announced last month that in its May-July quarter it posted its first year-over-year increase in signed home contracts since 2005. Toll Brothers even started cutting incentives in some markets, mostly in the Northeast and mid-Atlantic states.

Those incentives will be back in full-force by the end of the year.

True enough, the housing market remains weak. Increasing the tax credit to $15,000 for all homeowners through the end of next year would result in 675,000 additional home sales, according to an analysis by Mark M. Zandi, chief economist at Moody’s Economy.com (MCO).

And increasing it to $100,000 would result in 2,000,000 additional home sales.

There is evidence that sales fall when credits expire: In California, homebuilding slowed in July after a $10,000 credit for newly built homes expired. And with the rush of summer buying over, the market remains vulnerable to rising unemployment as well as a new wave of foreclosures, which could flood the market and drive down home prices. The Mortgage Bankers Assn. said last month that 9.24% of residential mortgage loans were delinquent as of the end of June, the most since recordkeeping began in 1972.

Finally…some rationality.

On the other hand, the housing market might be able to absorb more foreclosed properties as long as banks dribble them out slowly, says Rick Sharga, vice-president of Irvine (Calif.)-based RealtyTrac. “We may be in an unusual period of time where the market is recovering in spite of the record number of foreclosures,” he says. “It’s hard to explain, but that’s what the numbers suggest at the moment.”

The market found a false bottom this summer because banks weren’t actually completing many foreclosures. The shadow inventory is enormous and growing. The reason it’s “hard to explain” is because the concept of recovery makes absolutely no economic or common sense.

With prices down and mortgage rates low, housing affordability is the best in years for those who can qualify for a mortgage (admittedly no easy feat). Michelle Meyer, an economist with Barclays Capital (BCS) in New York, says that while the tax credit did contribute to the lift in sales and prices, “A lot of it has to do with greater affordability and a brighter economic outlook. Even if you say some of the gain is artificial, it’s still true that we’re seeing an increase in housing demand, and that shows fundamental strength.”

“Even if you say some of the gain is artificial…that shows fundamental strength.” ???

The bottom line is this: home prices are going to drop back down to where people can actually afford them (with real down payments and real loans)…and probably lower as society becomes generally more turned-off by home-ownership. During this price-discovery process, just about every loan that never should have been made, will need to get un-made. And, our overly-service-and-finance-based economy is going to need some fundamental restructuring to create real jobs to pay those mortgages.

No artificial incentives or temporary programs will bring real recovery any sooner. All they will do is drag this process out for years or even decades.

Related posts:

1. New Home Purchases at ALL Time Low So there has been lots of good news in the real estate market lately. Home sales have been up nationally...
2. Everything starts West and Heads East: inventory is going down for the country. Total housing inventory at the end of October fell 3.7 percent to 3.57 million existing homes available for sale, which...
3. What’s ahead for home prices? California remains ahead of the nation in market recovery with many first-time home buyers entering the market due to affordable...