Again the main driver in the housing market has been tax credits. The federal government is trying to reinflate home prices and the tax credit has been their main tool. According to the latest data from CoreLogic, March home prices increased 1.7% YoY. They reported that 51 of the 100 core markets they studied increased versus a 42 market increase in February. There is a "but" to this: prices have been declining in the past three months--1.7% for January and February and another 0.3% in March. If you take out foreclosure/distressed sales from the data, from peak to trough, prices declined 21.5% through March.
According to MDA DataQuick data, the market in Southern California is slowing because, among other factors, the percentage of distressed sales is declining. The flippers are starting to run out of product:
Southern California's housing market held its ground in April, data released Tuesday show, with prices rebounding off their year-earlier lows but sales slipping for the first time in nearly two years as the number of fast-selling foreclosure properties dwindled considerably.
The median price for all Southland houses, town homes and condominiums sold last month was $285,000, a 15.4% increase from the April 2009 bottom, when foreclosures accounted for more than half the resale market.
Sales for the region fell 1% in April compared with a year earlier — the first decline in 22 months — indicating that the Southland's supply of cheaper, bank-owned properties is tightening when compared with last year's glut. The month-to-month drop was almost the same, 0.9% compared with March....
Foreclosures have also dropped off considerably as a part of the resale market, accounting for 36.4% of sales in April compared with 53.5% a year earlier and an all-time high of 56.7% in February 2009.
The big news was that mortgage purchase applications plummeted:
The Refinance Index increased 14.5 percent from the previous week and the seasonally adjusted Purchase Index decreased 27.1 percent from one week earlier. This is the lowest Purchase Index observed in the survey since May of 1997. The unadjusted Purchase Index decreased 27.0 percent compared with the previous week and was 24.1 percent lower than the same week one year ago.
“Purchase applications plummeted 27 percent last week and have declined almost 20 percent over the past month, despite relatively low interest rates. The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season. In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “However, refinance borrowers did react to these lower rates, with refi applications up almost 15 percent, hitting their highest level in nine weeks.”
What this means is that there is very little holding this market up. The tax credit has stolen future sales which will result in a serious drop in sales. More disturbing is that this is happening as mortgage rates are 4.83%, or historically very low.
There is a lot of data to suggest that the shadow inventory, homes that are in or close to default, will continue to depress home prices, especially without the tax credit. The MBA also reported Thursday that mortgage delinquencies
increased to a seasonally adjusted rate of 10.06 percent of all loans outstanding as of the end of the first quarter of 2010, an increase of 59 basis points from the fourth quarter of 2009, and up 94 basis points from one year ago ...
The percentage of loans in the foreclosure process at the end of the first quarter was 4.63 percent, an increase of five basis points from the fourth quarter of 2009 and 78 basis points from one year ago. This represents another record high.
If Congress chooses to extend the credit, then prices will continue to hold steady, and flippers will stay in business for a while longer. But at some point the effect of the credits will be like pushing on a string. There are a lot of other factors that will influence future home prices beside the credit. These would be: deflationary pressures from foreclosures, upward pressure on interest rates after the EU calms down, the stagnant job market which I anticipate to continue, and GDP stagnation which I see happening in H2.
Another factor that will weigh on the housing market is the financial stability of the FHA, Fannie (FNM) and Freddie (FRE). Fannie and Freddie are broke, and the FHA is taking on too much risk as it takes up the slack. Without massive inflation to bail these institutions out, I would be wary of their future.
The tax credits show not only is Fed policy disruptive of the housing markets by preventing an orderly deflation/deleveraging of overvalued and over-financed assets, the chance that they will succeed inflating the market only means that they will create a bust-bust cycle: this time the economy will avoid the big boom part of the cycle and slip into stagnation weighed down with malinvestment and too much debt.
Disclosure: No positions