Housing Numbers

Good to see Free Exchange getting a little more realistic about the American housing market. A mildly positive Case-Shiller readout from November had them proclaiming a "broad-based stabilization" in house prices, despite massive and temporary government intervention in the housing market. As a non-homeowner, I am not a fan of these policies. Propping up house prices at a level that would otherwise be unsustainable is a highly inefficient undertaking. These policies are essentially wealth transfers to current homeowners from future taxpayers. To the extent that the programs are temporary, they are simply delaying future losses.

Even with all of this support, the market looks very fragile. New home sales and mortgage applications (the most current of popular housing indicators) are both at very low levels and price indicators look primed for another move downwards (my read). Inventory is still bloated and both the Fed MBS Purchase Program and Homebuyer Tax Credit program are ending in the next few months. I would expect house prices in lower-priced areas to drop around 10% with the end of these programs, as the credit currently takes a significant chunk out of down payments at the $100k-$150k price range and mortgage rates are expected to rise 50-100bp. Eventually Congress will get around to reforming the GSE's, the Fed will raise rates, and the housing market will settle at its true clearing price - ignoring for the moment the mortgage interest deduction, which most expect to continue indefinitely.