In June, home prices continued to rebound, but unevenly across the country. The Case-Schiller Composite 10 City index (C-10) rose 0.32% on a seasonally adjusted basis, and is up 5.02% from a year ago. The broader Composite 20 City index (which includes the cities in the C-10) rose by 0.28% on the month and is up 4.22% from a year ago. Of the 20 cities, nine posted gains on the month, while 11 saw prices fall.
Year over year, 15 metro areas saw gains and five suffered losses. There is a seasonal pattern to home prices, and thus it is better to look at the seasonally adjusted numbers than the unadjusted numbers. Most of the press makes the mistake of focusing on the unadjusted numbers.
While the 5.02% rise in the C-20 is good news, it hardly makes up for the damage that was done in the popping of the housing bubble, and it is also unlikely to last. From the April 2006 peak of the housing market, the C-10 is down 29.04% while the C-20 is off by 28.42%.
There were some surprises on the list of the best- and worst-performing cities for the month. The city with the most robust housing market, at least in terms of price gains on the month, is...Detroit! It posted a 1.67% gain on the month. Chicago was the only other city to see a gain of more than 1.0%, at a 1.24% gain. Other metro areas posting significant price increases on the month include the Twin Cities (Minneapolis/St. Paul) at 0.95%, Washington DC up 0.89%, New York up 0.71% and Atlanta, up 0.52%.
The cities faring the worst on the month are an interesting group since many were among the worst-hit early on, but which have started to rebound over the last year. It looks like that rebound might be running out of steam. Others have been seemingly perpetually on the list of hard-hit cities. Worst hit was Denver, where prices fell 1.01% on the month followed by Las Vegas, off another 0.87%. Seattle was down 0.79% while Phoenix fell 0.62%. Prices fell in San Francisco by 0.64% and in San Diego by 0.31%.
Year-over-Year Comparisons
On a year-over-year basis, the strongest cities are in California, which was an early poster child for the housing bust. San Francisco leads the way with a 14.29% rise, followed by San Diego, up 11.25%. The Twin Cities 10.30% rise broke up a Golden State sweep, but L.A. saw prices rise 9.22%.
On the downside, Las Vegas continues to roll snake eyes for those that gamble on its housing market, down 5.10% over the last year. At the other end of the spectrum is Charlotte, which early on in the bust seemed immune from the national trend. It is down 2.77% over the last year. Tampa is more in the Las Vegas camp, down hard early and still falling, off 1.65% over the last year. Seattle was the only other city to see a decline of more than 1% in the last year, down 1.83%.
The graph below (from http://www.calculatedriskblog.com/) tracks the cumulative declines for each city over time. If the red bar is shorter to the downside than the yellow bar for a city, it indicates that prices in that city have risen since the start of this year.
In every city, prices are below where they were in April 2006, but there is a huge variation. Las Vegas is the hardest hit, with prices down 56.52% from the peak, followed by Phoenix, down 51.02%. At the other end of the spectrum are Dallas, where prices are down only 2.95%, and Denver, where they are down 8.04%. (Note: the percentage declines I am quoting are from when the national peak was hit; the numbers in the graph are relative to that city’s individual peak, so there is a little bit of difference.)
I would attribute most of the recent strength in home prices to the homebuyer tax credit. The Case Schiller numbers are the gold standard for tracking housing prices, but it is very tardy data. These numbers are for June, and are actually a three-month moving average of April, May and June. Those were the peak months for the impact of the tax credit on existing home sales. People had until June 30 to close on their houses, and they had to agree to the transaction by April 30.
That pulled sales into those months that might otherwise have happened in July or August. The credit was up to $8,000, so almost nobody would want to close their deal in early July and simply leave that money on the table. The tax credit is a textbook example of a third-party subsidizing a transaction. When that happens, both the buyer and the seller will get some of the benefit. The buyer gets his when he files his tax return next year, the seller gets hers in the form of a higher price for the house.
Since the tax credit is now over, that artificial prop to housing prices has been taken away. Sales of existing houses simply collapsed in July, dropping 27.2% on the month. At the same time, the inventory of homes for sale actually increased by 2.5%. That one-two combination sent the months of supply to a new record high of 12.5 months.
Take a good hard look at the second graph (also from http://www.calculatedriskblog.com/2010_08_01_archive.html) and tell me what you think is going to happen to housing prices over the next few months. A normal market has about six months of supply available; during the bubble, the months of supply generally ran closer to four months, and prices were soaring.
It was not until inventories climbed above the six month mark that prices started to fall. They really collapsed as the months of supply moved into the double digits. The extensive government support for the housing market, including the tax credit, but also the Fed buying up $1.25 Trillion in mortgage paper to artificially depress mortgage rates, helped boost sales and bring the months of supply back down. Now that support is over, and the months of supply far exceed the worst we saw during the heart of the bust.
The tax credit was not a very effective means of stimulus, but it did help prop up prices, and that is a pretty important accomplishment, even if it proves to be ephemeral. The credit cost the government about $30 billion. A large part of that money went to people who would have bought anyway, but perhaps would have done so in July or August rather than May or June. To the extent it rewarded people for doing what they would have done anyway, it did nothing to stimulate the economy.
Also, turnover of existing houses really does not do a lot to improve the economy. It is the building of new houses that generates economic activity. A used house being sold does not generate more sales of lumber by International Paper (IP) or any of the building products produced by Berkshire Hathaway (BRK.B). It does not put carpenters and roofers to work.
Deep Connection to the Economy
While housing prices are important to the economy, the level of turnover in used houses is not. Home equity is, or at least was, the most important store of wealth for the vast majority of families. Houses are generally a very leveraged asset, much more so than stocks. Using your full margin in the stock market still means you are putting 50% down. In housing, putting 20% down is considered conservative, and during the bubble was considered hopelessly old fashioned.
As a result, as housing prices declined, wealth declined by a lot more. For the most part we are not talking vast fortunes here, but rather the sort of wealth that was going to finance the kids college educations and a comfortable retirement. With that wealth gone, people have to put away more of their income to rebuild their savings if they still want to be able to send the kids to college or to retire.
The decline in housing wealth is a very big reason why retail sales have been so weak. With everyone trying to save, aggregate demand from the private sector is way down. If customers are not going to spend and buy products, employers have no reason to invest to expand capacity. They have no reason to hire more workers.
Also, as housing prices fell, millions of homeowners found themselves owing more on their houses than the houses were worth. That greatly increases the risk of foreclosure. If the house is worth more than the mortgage, the rate of foreclosure should be zero. Regardless of how bad your cash flow situation is -- due to job loss, divorce or health problems, to cite but a few examples -- you would always be better off selling the house and getting something, even if it is less than you paid for the house, then letting the bank take it and get nothing.
By propping up the price of houses, the tax credit did help slow the increase in the rate of foreclosures. Still, 23% of all houses with mortgages are worth less than the value of the mortgage today. Another five percent or so are worth less than five percent more than the value of the mortgage. If prices start to fall again, those folks well be pushed under water as well.
Should Home Prices Be Propped Up?
On the other hand, it is not obvious that propping up the prices of an asset class is really something that the government should be doing. After all, it is hurting those who don’t have homes and would like to buy one. Support for housing goes far beyond just the tax credit. The biggest single support is the deductibility of mortgage interest from taxes.
Since homeowners are generally wealthier and have higher incomes than those that rent, this is a case of the lower middle class subsidizing the upper middle class. Also, even if they are homeowners, people with lower incomes are more likely to take the standard deduction rather than itemize their taxes. The mortgage interest deduction only applies if you itemize. Also, it greatly favors the old, who bought their houses long ago, over the young who have yet to buy a house.
The real problem though is that, now that the tax credit is over, prices will find their more natural level. Fortunately, relative to the level of incomes and to the level of rents, housing prices are now in line with their long-term historical averages, not way above them as they were last year. In other words, houses are fairly priced, not exactly cheap by historical standards, but not way overvalued either.
That will probably limit how much price fall over the next six months to a year to the 5 to 10% range, rather than the 30% decline we saw from the top of the bubble. That, however, is more than enough of a decline to do some serious damage.
The Case Schiller report was more of less in line with expectations, but this should be the last hurrah for a while when it comes to housing prices. Residential investment is normally the main locomotive that pulls the economy out of recessions. It is derailed this time around, and there seems to be little the government can do to get it back on track.
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While the 5.02% rise in the C-20 is good news, it hardly makes up for the damage that was done in the popping of the housing bubble, and it is also unlikely to last. From the April 2006 peak of the housing market, the C-10 is down 29.04% while the C-20 is off by 28.42%.
There were some surprises on the list of the best- and worst-performing cities for the month. The city with the most robust housing market, at least in terms of price gains on the month, is...Detroit! It posted a 1.67% gain on the month. Chicago was the only other city to see a gain of more than 1.0%, at a 1.24% gain. Other metro areas posting significant price increases on the month include the Twin Cities (Minneapolis/St. Paul) at 0.95%, Washington DC up 0.89%, New York up 0.71% and Atlanta, up 0.52%.
The cities faring the worst on the month are an interesting group since many were among the worst-hit early on, but which have started to rebound over the last year. It looks like that rebound might be running out of steam. Others have been seemingly perpetually on the list of hard-hit cities. Worst hit was Denver, where prices fell 1.01% on the month followed by Las Vegas, off another 0.87%. Seattle was down 0.79% while Phoenix fell 0.62%. Prices fell in San Francisco by 0.64% and in San Diego by 0.31%.
Year-over-Year Comparisons
On a year-over-year basis, the strongest cities are in California, which was an early poster child for the housing bust. San Francisco leads the way with a 14.29% rise, followed by San Diego, up 11.25%. The Twin Cities 10.30% rise broke up a Golden State sweep, but L.A. saw prices rise 9.22%.
On the downside, Las Vegas continues to roll snake eyes for those that gamble on its housing market, down 5.10% over the last year. At the other end of the spectrum is Charlotte, which early on in the bust seemed immune from the national trend. It is down 2.77% over the last year. Tampa is more in the Las Vegas camp, down hard early and still falling, off 1.65% over the last year. Seattle was the only other city to see a decline of more than 1% in the last year, down 1.83%.
The graph below (from http://www.calculatedriskblog.com/) tracks the cumulative declines for each city over time. If the red bar is shorter to the downside than the yellow bar for a city, it indicates that prices in that city have risen since the start of this year.
In every city, prices are below where they were in April 2006, but there is a huge variation. Las Vegas is the hardest hit, with prices down 56.52% from the peak, followed by Phoenix, down 51.02%. At the other end of the spectrum are Dallas, where prices are down only 2.95%, and Denver, where they are down 8.04%. (Note: the percentage declines I am quoting are from when the national peak was hit; the numbers in the graph are relative to that city’s individual peak, so there is a little bit of difference.)
I would attribute most of the recent strength in home prices to the homebuyer tax credit. The Case Schiller numbers are the gold standard for tracking housing prices, but it is very tardy data. These numbers are for June, and are actually a three-month moving average of April, May and June. Those were the peak months for the impact of the tax credit on existing home sales. People had until June 30 to close on their houses, and they had to agree to the transaction by April 30.
That pulled sales into those months that might otherwise have happened in July or August. The credit was up to $8,000, so almost nobody would want to close their deal in early July and simply leave that money on the table. The tax credit is a textbook example of a third-party subsidizing a transaction. When that happens, both the buyer and the seller will get some of the benefit. The buyer gets his when he files his tax return next year, the seller gets hers in the form of a higher price for the house.
Since the tax credit is now over, that artificial prop to housing prices has been taken away. Sales of existing houses simply collapsed in July, dropping 27.2% on the month. At the same time, the inventory of homes for sale actually increased by 2.5%. That one-two combination sent the months of supply to a new record high of 12.5 months.
Take a good hard look at the second graph (also from http://www.calculatedriskblog.com/2010_08_01_archive.html) and tell me what you think is going to happen to housing prices over the next few months. A normal market has about six months of supply available; during the bubble, the months of supply generally ran closer to four months, and prices were soaring.
It was not until inventories climbed above the six month mark that prices started to fall. They really collapsed as the months of supply moved into the double digits. The extensive government support for the housing market, including the tax credit, but also the Fed buying up $1.25 Trillion in mortgage paper to artificially depress mortgage rates, helped boost sales and bring the months of supply back down. Now that support is over, and the months of supply far exceed the worst we saw during the heart of the bust.
The tax credit was not a very effective means of stimulus, but it did help prop up prices, and that is a pretty important accomplishment, even if it proves to be ephemeral. The credit cost the government about $30 billion. A large part of that money went to people who would have bought anyway, but perhaps would have done so in July or August rather than May or June. To the extent it rewarded people for doing what they would have done anyway, it did nothing to stimulate the economy.
Also, turnover of existing houses really does not do a lot to improve the economy. It is the building of new houses that generates economic activity. A used house being sold does not generate more sales of lumber by International Paper (IP) or any of the building products produced by Berkshire Hathaway (BRK.B). It does not put carpenters and roofers to work.
Deep Connection to the Economy
While housing prices are important to the economy, the level of turnover in used houses is not. Home equity is, or at least was, the most important store of wealth for the vast majority of families. Houses are generally a very leveraged asset, much more so than stocks. Using your full margin in the stock market still means you are putting 50% down. In housing, putting 20% down is considered conservative, and during the bubble was considered hopelessly old fashioned.
As a result, as housing prices declined, wealth declined by a lot more. For the most part we are not talking vast fortunes here, but rather the sort of wealth that was going to finance the kids college educations and a comfortable retirement. With that wealth gone, people have to put away more of their income to rebuild their savings if they still want to be able to send the kids to college or to retire.
The decline in housing wealth is a very big reason why retail sales have been so weak. With everyone trying to save, aggregate demand from the private sector is way down. If customers are not going to spend and buy products, employers have no reason to invest to expand capacity. They have no reason to hire more workers.
Also, as housing prices fell, millions of homeowners found themselves owing more on their houses than the houses were worth. That greatly increases the risk of foreclosure. If the house is worth more than the mortgage, the rate of foreclosure should be zero. Regardless of how bad your cash flow situation is -- due to job loss, divorce or health problems, to cite but a few examples -- you would always be better off selling the house and getting something, even if it is less than you paid for the house, then letting the bank take it and get nothing.
By propping up the price of houses, the tax credit did help slow the increase in the rate of foreclosures. Still, 23% of all houses with mortgages are worth less than the value of the mortgage today. Another five percent or so are worth less than five percent more than the value of the mortgage. If prices start to fall again, those folks well be pushed under water as well.
Should Home Prices Be Propped Up?
On the other hand, it is not obvious that propping up the prices of an asset class is really something that the government should be doing. After all, it is hurting those who don’t have homes and would like to buy one. Support for housing goes far beyond just the tax credit. The biggest single support is the deductibility of mortgage interest from taxes.
Since homeowners are generally wealthier and have higher incomes than those that rent, this is a case of the lower middle class subsidizing the upper middle class. Also, even if they are homeowners, people with lower incomes are more likely to take the standard deduction rather than itemize their taxes. The mortgage interest deduction only applies if you itemize. Also, it greatly favors the old, who bought their houses long ago, over the young who have yet to buy a house.
The real problem though is that, now that the tax credit is over, prices will find their more natural level. Fortunately, relative to the level of incomes and to the level of rents, housing prices are now in line with their long-term historical averages, not way above them as they were last year. In other words, houses are fairly priced, not exactly cheap by historical standards, but not way overvalued either.
That will probably limit how much price fall over the next six months to a year to the 5 to 10% range, rather than the 30% decline we saw from the top of the bubble. That, however, is more than enough of a decline to do some serious damage.
The Case Schiller report was more of less in line with expectations, but this should be the last hurrah for a while when it comes to housing prices. Residential investment is normally the main locomotive that pulls the economy out of recessions. It is derailed this time around, and there seems to be little the government can do to get it back on track.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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