August 30, 2011 (Housing Market Monitor)
By Dean Baker
The first-time buyers credit shifted bad mortgages to the government.
The Case-Shiller 20-City index rose by 1.1 percent in June. This is the third consecutive increase following eight months of decline. All 20 cities showed increases in June, with some of the largest gains in the badly hit Midwest markets.
The biggest gains in June were the 3.2 percent month-to-month increases reported for both Chicago and Minneapolis. Detroit reported a 2.2 percent jump, while Cleveland reported a 1.5 percent gain. These sharp increases appear to have been driven primarily by price jumps in the bottom third of the market. Detroit and Cleveland don’t have tier indexes, but in Chicago, the price of homes in the bottom tier rose 6.5 percent in June, while in Minneapolis they rose by 6.1 percent. However, even with these rises, prices are still down sharply from year-ago levels, 23.7 percent in the case of Chicago and 28.9 percent for Minneapolis.
The prices of bottom-tier homes in these markets have followed an accordion pattern in response to the first-time buyers tax credit. It not only stopped the decline, but also led to sharp appreciation. Prices of bottom-tier homes in Chicago rose 11.4 percent from their trough in the spring of 2009. The rise in Minneapolis was 29.1 percent. These prices then tumbled followed the expiration of the first-time homebuyers tax credit last summer and are now regaining a bit of lost ground.
In effect, the credit got many buyers to come into the market and buy homes at temporarily inflated prices. People who bought at the peak of this tax-credit-induced mini-bubble have seen much or all of their equity vanish almost overnight. There was a similar pattern in other cities; although not nearly as extreme as in these Midwest cities.
This should not be surprising since an $8,000 tax credit will be far more important relative to the price of lower-cost homes in the Midwest than in the more expensive coastal cities. It also is not surprising that the biggest effect would be felt in the bottom portion of the market.
This price pattern should raise serious questions about the impact of this policy. The temporary surge in prices allowed many homeowners to get out of their homes with some equity, or at least a manageable loss. On the other hand, it passed the losses on to the new home buyers. The temporary jump in prices also allowed millions of homeowners to refinance.
In the vast majority of cases, this likely meant getting out of a loan that was held by a bank or was part of a private-issue mortgage-backed security and getting into a mortgage that was subsequently bought by Fannie Mae or Freddie Mac. This transferred the risk on these loans to the government.
Other cities with large price increases included Boston with a 2.4 percent rise and Charlotte with a 2.0 percent rise. Boston’s market has remained relatively strong through the downturn. Charlotte never had much of a boom and therefore has not seen a large bust.
On the other side, prices increased by just 0.1 percent in Las Vegas, where the market remains extremely weak. In San Diego, they increased by 0.2 percent, and in Phoenix and Los Angeles, by 0.3 percent. Phoenix, like Las Vegas, has a collapsed bubble where prices overshot on the downside. Prices are now hovering at historically low levels. In San Diego and Los Angeles, the bubbles have not fully deflated. There is almost certainly some way to go on the down side in these cities.
It is extremely unlikely that the June data could be the beginning of a turnaround for prices. Last month, the Census Bureau released data on vacancy rates for the second quarter. While they have edged down slightly from their peak, vacancy rates on both ownership and rental units remain at near-record-high levels. This enormous excess supply of housing will exert downward pressure on house prices at least through 2012. The tightening of credit by lowering limits on conformable mortgages will also put downward pressure on prices. In short, it is likely that this upturn in prices will not persist.