Strong Housing Data Fail Yet Again to Boost the Market

The Case-Shiller home price index (released today at 9AM with data for the month of August) was reported much-better than expected: the year-over-year decline was 11.3% vs the median expectation of 11.9%. The un-adjusted index (not taking into account seasonality effects) is up for the fourth month in a row by 4.8% nationwide, and only 2-3 areas (out of the 20 surveyed in total) have experienced further declines in the past few months. Only Las Vegas has continued to see home price declines, but August prices were down only 0.3%. CA is up 4-13% depending on the metro area, with 5 months of gains. Florida is considered to remain more stressed than CA, but it has seen stronger prices for the past 3 months.

August home prices were 1.2% higher than July; an improvement, but a slower one compared to a 1.4% one-month gain in June and another 1.6% gain in July. As we are entering a seasonally weaker period, a slowdown in home price gains is expected. The peak-to-trough decline in home prices is 33%, whereas the peak-to-current decline has improved to 29% (the peak month was July 2006). The 20-city index is now back to fall 2003 levels. Some analysts estimate that we have to get back to 2001-2002 price levels based on a steady-state homeownership rate, which would imply a further decline of at least 10%.

Despite a stronger-than-expected Case-Shiller report and persistent signs of stabilization in the housing market, there is a big concern around the drivers of the "beat", namely that the government's $8,000 tax credit and the FHA's increasing financing of home purchases account for the price stability. Both support elements are not sustainable: the $8,000 tax credit will be phased out and eliminated within a year at the latest, and the FHA cannot continue underwriting problem loans because it will quickly become insolvent and will require a bailout (some claim it's already bankrupt). The question is: who will buy homes when the government turns the spigots off?

The combination of the two government support mechanisms for the housing market practically gives away homes for free with no downpayment. In conjunction with the low incomes and very-low FICO scores that are specifically targeted, the current plan seems to replace the excesses and fraud perpetuated by loosely regulated banks and misaligned incentives for brokers. Repeating the mistakes of the past under different guise just may not be the solution to the problem.

Comments

[dollarandbu...:]

Is this housing data looking better because of dollar devaluation?. I think so.

Oct 27 11:38 AM

[LikeSoup:]

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Oct 27 11:41 AM

[LikeSoup:]

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Oct 27 11:42 AM

[Radardoc:]

What happens to the Case-Schiller index if the prices were just reflecting that more expensive (bigger) homes were hitting the market at the same loss we have seen in the lower-end? Would that bring the index up, even though the market was going down?

For example: ten homes once valued at 600K sell for 300K = avg 300K. Make it nine homes once valued at 600K sell for 300K and one home once valued at 1M sells at 500K = an average of 320K

Everyone has still lost 50% but the average house price has gone up almost 7%. Wow, let's throw a party!

Oct 27 05:54 PM

[pitchingpen...:]

Rdoc- You are spot on. The pain, in dollar scale format, is just being reflected as it moves up the socio-economic ladder.

Oct 28 02:17 PM