Tuesday, September 29, 2009

Home Prices are Up But is the Rise Just Artificial and Bound to Fall Again?

Home Prices Rebound as Tax-Credit Expiration Looms

A national average of home prices increased 1.6% from June to July, according to the S&P/Case-Shiller report

Is the home price recovery real or being artificially supported by the $8,000 first-time home buyer's tax credit that's scheduled to expire at the end of November?

That's one of the questions being raised by the Standard & Poor's/Case-Shiller home price report for July, issued Sept. 29. Home prices increased 1.6% from June to July in the 20 metro markets tracked by the report, though they are still down 13.3% from a year ago. It was the third straight month of price increases for the 20-market average, as well as a narrower 10-city composite.

"The rate of annual decline in home price values continues to decelerate and we now seem to be witnessing some sustained monthly increases across many of the markets," David M. Blitzer, chairman of the index committee at Standard & Poor's, said in a news release. "The two composites and all metro areas are showing an improvement in the annual rates of return, as seen through a moderation in their annual declines."

All but two of the 20 metros showed price increases from June to July. The outliers are Las Vegas, down 1.1% for the month and 31.4% year-over-year, and Seattle, down 0.1% for the month and 15.3% year-over-year.

Blitzer said the report indicates a continued "stabilization in national real estate values," but added, "we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer's Tax Credit in November, anticipated higher unemployment rates, and a possible increase in foreclosures."


The National Association of Realtors and the National Association of Home Builders are pressing for an extension of the tax credit into next year. The Realtors group said in mid-September that 350,000 new buyers would not have purchased a home this year without the credit, which may cost the Treasury as much as $15 billion. Opponents of an extension say it would be too costly to taxpayers. Several bills have been introduced to expand and extend the credit, and earlier this month the White House said its economic team is looking at the various options.

Paul Dales, U.S. economist for Capital Economics in Toronto, said in a report on Sept. 29 that while prices are being supported by the tax credit, more significant drivers are economic stabilization and a decline in mortgage rates below 5%. "This suggests that the recovery will continue even if the tax credit is not extended beyond November," Dales writes. "That said, without the tax credit the pace of the recovery in both activity and prices will slow. Moreover, on the Case-Shiller measure prices remain [more than] 30% below their peak. Accordingly, even a fairly robust recovery may not provide much of a boost to consumption."