The Quest for Good News in a Housing Crash

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May 6, 2009 (Housing Market Monitor)

The Quest for Good News in a Housing Crash

By Dean Baker

May 6, 2009

Prices for bottom tier homes in Phoenix are down 65.9 percent from their bubble peak.

There have been numerous news accounts touting a bottom in the housing market in recent weeks. Some of these accounts, most notably those touting the uptick in housing starts shown in the February data, simply missed random weather-driven changes. However, there is some evidence of a bottoming out, although still little appreciation of what that means.

The clearest evidence of a bottom is coming from the Pending Home Sales Index, which measures contracts signed. This index rose by 3.2 percent in February and is actually 1.1 percent above its year ago level. This suggests that sales volume has bottomed out and may even be inching up.

However, this does not mean that prices are anywhere close to hitting a bottom. The most recent Case-Shiller data showed house prices dropping 1.9 percent in the February 20-city index. Prices will not just stop falling. The rate of decline must first slow from an annual rate of more than 20 percent over the most recent quarter.

The recent uptick in sales in many areas is likely the result of speculators looking for bargains now that prices have given up most or all of their bubble froth in many areas. For example, in Los Angeles, prices for homes in the bottom third of the market were falling at a 28.9 percent annual rate over the last quarter. Homes in this segment of the market were selling for less than half their price at the peak of the bubble in July of 2006.

Similarly, in Miami, prices for homes in the bottom tier of the market were falling at a 34.5 percent annual rate over the quarter. Prices for these homes are now down by 52.6 percent from their peak in March of 2007. In Washington, D.C., prices for the bottom tier of houses were falling at a 39.6 percent annual rate. They are now down by 46.0 percent from the peak in June of 2006. In Phoenix, prices for homes in the bottom tier were falling at an incredible 74.8 percent annual rate. (There are undoubtedly some measurement issues here.) Prices for these homes are now down 65.9 percent from their peak in July of 2006.

Given these sharp drops in prices, it would be expected that speculators would see buying opportunities that appear to hold little downside risk. The geographical distribution of the rise in sales seems to fit this pattern. The South and West had higher sales, while the Midwest and Northeast continued to see sales decline.

Also consistent with this picture is the continued weakness in the Mortgage Bankers Association’s (MBA) Purchase Index. This index continues to hover at very low levels with no discernible upward trend. If speculators are arranging for large-scale financing of home purchases, instead of mortgages tied to individual houses, then we could see an uptick in sales without an uptick in mortgage applications.

Interestingly, the refinancing component of the MBA index is now more than 20 percent below the peaks hit last month. It seems likely that the rush of refinancing is now abating as most of those who are in a position to take advantage of lower rates have already done so. Unless the Fed takes extraordinary measures to push mortgage rates even lower, refinancing is likely to taper off sharply in the weeks ahead.

The lower rates resulting from the Fed’s actions have helped many people stay in their homes and have also provided some boost to the economy, but the impact has been exaggerated by many analysts. If $3 trillion in mortgage debt (roughly a third of the outstanding debt) is refinanced at an average savings of 1.0 percentage point (surely a high-end estimate), this would save homeowners a total of $30 billion a year in mortgage payments. This has the same impact on purchasing power as an increase in wages of 0.3 percent – a typical monthly wage gain.

Anything that puts more money in consumers’ pockets is desirable in the current economic situation, and the refinancing activity itself helps to create jobs (albeit at a cost to consumers), but refinancing will not provide a major spur to growth.   


Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.