Cato: A Double Dip for Housing?

[spursncowboys]

A Double Dip for Housing?

Posted by Thomas Firey
Washington is fretting this week over news that mortgage applications fell dramatically in November. Coupled with earlier indications of renewed softening in the housing market, there is growing fear that housing is headed for a “double-dip downturn” that could further damage the economy. As a result, Federal Reserve policymakers are considering additional stimulus, while the National Association of Realtors is suggesting an(other) extension of the “temporary” homebuyer tax credit.
Remarkably, neither policymakers nor the media are asking the obvious question: Given all of the emergency interventions in housing that government has undertaken, and the fact that the housing market continues to erode, do such interventions do much good?
Since the bursting of the bubble in 2006, the great unknown has been whether housing prices will ultimately revert to their historical trend (and possibly to below trend for a short period), or whether price levels will stabilize at some permanently higher level because a portion of the bubble (aided perhaps by public policy) would prove enduring. There is good reason to expect reversion to trend, but the economy can surprise us.
Let’s use an example to understand this better. The graph below depicts the course of house prices for my hometown of Hagerstown, MD, an area within commuting range of suburban DC that was hit particularly hard by the bubble and its deflation. The black line is a house price index computed by the Federal Housing Finance Agency for 1989–2009. The red line is an extended linear trendline drawn using index data from the period 1989–2002. (You can do the same analysis for your area using these FHFA data.) The question, then, is whether house prices will fall all the way back to the trendline or will stabilize at a level above the trendline.

The sharp downward slope at the end of the price line and the latest housing news suggest that Hagerstown is destined to revert to trend (perhaps after a period below trend). I’ve drawn similar figures for several other locations and they show similar patterns. It looks like the nation’s housing markets, for the most part, are reverting to trend.
When this crisis first began in 2007, Bush administration officials vowed to “stabilize house prices at the highest possible level.” However, despite their efforts and those of the Obama administration, Congress, and the Fed, reversion to trend appears inevitable. At best, those efforts may have slowed the reversion — in which case, I suppose the Bush goal has been met.
It can be argued that a gentler reversion to trend may be more tolerable than a sharp return. On the other hand, there are fears that a lengthy softening of the housing market will lead to more defaults, less worker mobility, continued weak consumption, and a long period of high unemployment and stagnant wages for those who are working. Perhaps a sharp return would be the quickest way to shed the ill effects of the bubble.
This leaves us with a final question that policymakers, the media, and the public should be grappling with: If all of these emergency housing interventions only result in a slower reversion to trend, then is that benefit worth the cost?

[EVAY]

But wasn't this downturn somewhat expected because of the inflated numbers in October from those trying to get in under the wire for the $8K tax break for first time home buyers? (So that everyone who was even thinking of buying last year was gonna try to get it done before Nov. so as to cash in on the tax break?)

And now that tax break has been extended, I believe. This is not to say that the tax break is a good or bad idea. I'm just suggesting that it might explain the dramatic difference in numbers between October (which was wildly positive) and November.

[ChumpDumper]

It is a good question -- what are we trying to accomplish here?

Are we just trying to reinflate the bubble?

[EVAY]

It is a good question -- what are we trying to accomplish here?

Are we just trying to reinflate the bubble?

I would assume that the administration is hoping that if housing prices can be sustained (even if they are sustained by artificial means, i.e. non-permanent tax breaks) for a long enough period of time, the economy will recover enough to let the natural market take over again, without any more people losing their homes, or defaulting because their house is 'under water'.

But, I could be wrong. I often try to attribute reason to situations that are inherently irrational.

[Nbadan]

It is a good question -- what are we trying to accomplish here?

Are we just trying to reinflate the bubble?

I think they are trying to stimulate new housing starts - a large segment of the economy...no homes get built, no money gets generated...

[Nbadan]

I would assume that the administration is hoping that if housing prices can be sustained (even if they are sustained by artificial means, i.e. non-permanent tax breaks) for a long enough period of time, the economy will recover enough to let the natural market take over again, without any more people losing their homes, or defaulting because their house is 'under water'.

But, I could be wrong. I often try to attribute reason to situations that are inherently irrational.

Your right....but don't forget that new home construction generates income from planning, to building, to selling, to paying taxes and mortgage.......

I would be much more worried if banks were freely-wheely lending money like they were during the last housing bubble....as it is now, it's tough to get a private loan - that's why most are FHA or VA..

[ChumpDumper]

Wouldn't stimulating starts in an already saturated market actually decrease the value of existing homes?

[Nbadan]

Wouldn't stimulating starts in an already saturated market actually decrease the value of existing homes?

Only if your over-building in over-saturated markets.....but real estate is regional, for instance, demand in Texas is good and other parts of the country..

[ChumpDumper]

But if demand in Texas is already good, is there that much need for stimulus?

[Aggie Hoopsfan]

Wait, so home sales fell off after the craptastic D.C. tax credit giveaway?

Shocking. Next thing you know Feddie and Frannie will be given an unlimited bankroll to lend to people who shouldn't qualify anyway.... oh wait, Team Obama just slipped that fact in on Christmas Eve.

Assholes.

[ChumpDumper]

Isn't the tax credit still in effect for several months?

[Nbadan]

But if demand in Texas is already good, is there that much need for stimulus?

Of course there is...even in soft markets the stimulus money will have a positive effect...

[Nbadan]

Why does Aggie hate growth? and....Where was Aggie when the Bush administration was loosening credit restrictions for private lenders that created the housing bubble?

[Nbadan]

Isn't the tax credit still in effect for several months?

Yes, you must enter into a purchase agreement by April 30th..

[ChumpDumper]

Why does Aggie hate growth? and....Where was Aggie when the Bush administration was loosening credit restrictions for private lenders that created the housing bubble?

I'm not sure why he would be against tax credits either, but as you can see a lot of this confuses me.

[DarrinS]

Why does Aggie hate growth? and....Where was Aggie when the Bush administration was loosening credit restrictions for private lenders that created the housing bubble?

Hmmmmmmm

[ChumpDumper]

YouTube!

Eight and a half minutes!

Watch it!

At work!

[Winehole23]

But wasn't this downturn somewhat expected because of the inflated numbers in October from those trying to get in under the wire for the $8K tax break for first time home buyers?

Context. For which, thanks.

If all of these emergency housing interventions only result in a slower reversion to trend...

From the included graph, it looks like home prices have a ways to go before they even begin to reach the historical mean. I'm not sure what accounts for the optimism of the author that the brakes have already been successfully applied. Like Chump pointed out, stimulating supply in an overbuilt market would seem to be counterintuitive. Maybe the thinking is that the tax credit will take existing homes off the market faster.

...then is that benefit worth the cost?

Counting chickens beforre they've hatched IMO. Again, even though the OP seems to be damning Obama's countercyclical action in the housing market with faint praise, calling it a benefit begs the question, for whom?

Having prices revert to the historical mean is supposed to happen when a bubble bursts. Price discovery is a clear benefit to anyone who isnt a lending ins ution, who has hopes of owning their own home in the future.

The theme in 2010, as in 2009, might be deflation again, as reflected by anemic GDP growth and falling real estate prices and inflected by current events. Maybe even despite rising energy costs.

And now that tax break has been extended, I believe.

Seeing soi disant conservatives throw cold water on tax breaks warms the les of my heart, even if they're doing it for the wrong reasons.

The stimulus seems to have kept the banking/investment sector afloat so far. The big question in my mind is whether or not it is setting the stage for an even worse correction somewhere down the road. Not so much that the benefit isn't worth the cost, as that it might not have been a very good idea to begin with, IMO.

[Winehole23]

At any rate, propping up home prices is fundamentally misguided unless the aim is to prop up lending ins utions.

[Nbadan]

YouTube!

Eight and a half minutes!

Watch it!

At work!

boom!

[ChumpDumper]

Is that Dutch?

At least it's shorter.

[Winehole23]

http://www.calculatedriskblog.com/2012/10/the-housing-bottom-and-unemployment-rate.html

[boutons_deux]

Cato true to form (and it's carbon industry financiers)

Cato Ins ute Crafts Fake ‘Addendum’ To Federal Climate Report: ‘It’s Not An Addendum, It’s A Counterfeit’

http://thinkprogress.org/climate/201...a-counterfeit/

"Libertarian" is really nothing but hard-core VRWC/UCA/Repug positions with a couple exceptions.

[Clipper Nation]

You're an idiot if you think libertarian and "Repug" are the same.... you should support a full libertarian system, because the corporations you distrust would not get special privileges.....

[boutons_deux]

You're an idiot if you think libertarian and "Repug" are the same.... you should support a full libertarian system, because the corporations you distrust would not get special privileges.....

they're close enough

corporations would love libertarianism's anti-regulation, de-regulation stuff. Then the corps could really up our health and planet.