December 23, 2009 (Housing Market Monitor)

By Dean Baker

Bottom-tier house prices in Minneapolis rose at an 84.9 percent rate in the last three months.

The National Association of Realtors reported that existing home sales rose 7.4 percent in November, spurred by the original expiration date for the first-time buyer tax credit. The rise in November sales followed several months of sharply higher home sales. November sales were 45.7 percent higher than the low point hit in January. The 6,540,000 annual sales rate was actually higher than the year-round average for 2006, the year when the housing bubble peaked.

The uptick in condominium sales was even more pronounced, with the November level 75.0 percent above the January low. Year-over-year condo sales are up 60.1 percent. The huge glut of condos on the market has been whittled down considerably, with the inventory now just 8.1 months of sales, compared to 16.4 months in November of last year. Of course, as the sales rate falls back this figure will rise again. In addition, there is a large stockpile of condos whose owners have delayed putting them up for sale waiting for an improvement in the market. These units will add to the inventory in the spring.

There can be little doubt that the first-time buyer credit sharply stimulated sales. However, the credit primarily succeeded in getting would-be buyers to move their already planned purchase forward instead of drawing in new buyers who would not otherwise have been in the market. This is clearly shown by the plunge in purchase-mortgage applications in late October and November, after buyers could no longer count on closing in time to get the credit. Even with the extension of the credit, there has been little rebound in this measure. For the most recent week, applications were down 32.7 percent from the weak levels of 2008.

If the tax credit is driving the run-up in sales then we should expect to see more of an impact at the lower end of the market than the high end for the simple reason that the $8,000 credit will make much of a difference in the purchase price of a $150,000 home than a $550,000 home. The data from the Case-Shiller tiered indexes largely support this story.

Annual Rate of Increase In House Prices, Third and Bottom Tier

In Chicago, house prices in the bottom third of the market rose at a 39.9 percent annual rate over the last three months, while house prices in the top tier rose at a 23.5 percent rate. In San Francisco, prices for houses in the bottom tier rose at a 27.4 percent annual rate, while prices for homes in the top tier rose just 5.8 percent. In Phoenix, prices for homes in the bottom tier rose at a 54.0 percent rate, while prices for homes in the top tier rose at a 6.7 percent rate. In Minneapolis, prices for homes in the bottom tier rose at an incredible 84.1 percent annual rate over the last three months, while prices for homes in the top tier rose at a 42.9 percent rate.

While there are clearly other factors propelling the extraordinary price increases in bottom-tier homes in Phoenix and Minneapolis (likely a surge of speculators taking advantage of what they perceive as rock bottom prices), the Case-Shiller data suggest that the tax credit has had a substantial impact in boosting prices in recent months. However, with so many buyers pulled into the market by the credit, the market is likely to be notably weaker in 2010 as a result of the credit.

This will be even more the case after April, when the extension is scheduled to expire. Mortgage interest rates will also be creeping up as the Fed’s program of buying mortgage-backed securities is phased out over the next three months. In addition, The FHA will be tightening up its lending practices, which will exclude many potential homebuyers from the market. As well, the New York Times recently reported that Fannie Mae and Freddie Mac are incurring such large losses that they will soon request a doubling of their government lines of credit to $400 billion each. If this proves accurate, it will almost certainly necessitate a further tightening of their lending practices. In this context, the only question is when will house prices resume their decline.