Housing Muddle

I commented just two days ago about the state of the housing market. The data that prompted me then was the release of home price trends by the Federal Housing Finance Authority – prices have risen very slightly over a period of a few months which suggests that the market has hit bottom.

But today we find out, from the National Association of Realtors, that the sales of existing homes dropped 2.7% last month breaking the trend of slight increases that had set in over the early part of the summer.

Clearly the housing market remains a muddle.

The importance of today’s number is that it speaks to a pervasive fear held by many if not most analysts: that the economy is growing only insofar as the government stimulus aids it. There is little, if any, self-sustaining growth within the non-government, private, economy. That, obviously, is not good news.

How do we discern this from today’s release?

One of the boosts to home demand over the summer was the first time buyers tax credit included as part of the overall government stimulus plan. All summer long we have been looking at the apparent recovery in housing and wondering to what extent the tax credit was pushing sales beyond where they would be in their ‘unassisted’ state. With this new data in hand we can start to argue that the impetus in housing was very largely due to the government trying to kick start the market. Absent the government and the action looks a whole lot weaker than we had hoped.

Now: let me caution us all. This is just one figure amongst a sea of data. It might be an end of summer aberration. It certainly looks as if some sales were encouraged by the tax credit to take place earlier than the might otherwise have been – people rushed to buy in order to get their credit – so the effect was to bunch the sales for the second half of the year into three months. If that is true we will see weaker numbers next month as well and so on through the rest of the year.

It is hard to pin the drop in sales on interest rates. Mortgages are still relatively cheap. So that is not a cause of a decline in sales.

But perhaps the tighter credit standards are. As banks adopt tighter standards with which to identify qualified buyers inevitably the pool of buyers becomes more restricted. This leads to fewer transactions and could be the reason for the drop in sales reported today. Add in the other factors we have discussed here: unemployment, household debt burdens, weak debt to equity ratios, and a need to re-build savings, and it becomes more clear that the housing market has a long way to go before it can be claimed to be ‘recovered’.

At times like these it is often impossible to pin a movement onto one cause: the entire edifice of the economy has been rocked, so it provides a multiplicity of potential causes. Plus all of them are inter-twined to an enormous degree.

So my best guess is that housing has not recovered to the extent suggested by the early summer data: the market was distorted by the stimulus package. With that said it is not as bad as it was. The price data suggests that some strength is returning. But we are a very long way off being able to say that the market is healed. As I said earlier this week I cannot foresee a truly healthy real estate market until 2015, and maybe not until 2018.

One month’s data doesn’t prove that view to be correct, but it helps support the argument.

Housing remains rotten. Just not quite as rotten as this time last year.