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Faux-Housing Prices are Up

Anthony Randazzo
January 26, 2010, 11:05am

Numbers are in for housing prices from last November... and the numbers apparently look good. From the AP:

Home prices rose for the sixth straight month in November, with 14 of 20 metro areas posting improvements from the month before.

The Standard & Poor's/Case-Shiller home price index released Tuesday inched up 0.2 percent to a seasonally adjusted reading of 145.49. The index was off 5.3 percent from November last year, nearly matching analyst's estimates that it would fall by 5.1 percent.

The index is now up 3.4 percent from its bottom in May, but still 30 percent below its peak in May 2006.

Phoenix and San Francisco posted the highest month-to-month gains on a seasonally adjusted basis, while New York and Chicago had the largest declines.

On its face this appears to be good news. However, the likely cause of these gains is not an organic recovery in the housing market. Prices are being pushed up by two main things:

  1. The First-Time Homebuyer Credit started in 2008, expanded by the Stimulus in 2009, and extended to April 2010 after 1.4 million people applied for the credit by last September. This credit has increased demand that otherwise wouldn't be there. And as a result it has caused housing prices to increase. Whether the intention of the administration or not, sellers are getting most of the benefit from the credit as they raise the price of the asking price of their homes knowing buyers are coming armed with up to $8,000 extra in cash.
  2. There has been a slow down in homes that have been pushed from the 120-day delinquency lists into foreclosure. Banks are under pressure from the government not to foreclose. Cities across the U.S. have instituted periodic foreclosure moratoriums. And that is not to mention the swell of mortgage defaults has simply overwhelmed bank workout systems. As a result there are hundreds of thousands if not millions of homes in a shadow inventory. This may be good for the homeowners who are living in their homes for up to two years without paying, but it means the real supply of homes is not on the market. A higher supply would dilute prices because of the increased choices. Until the shadow inventory fully surfaces, prices will not reflect the actual supply that should be available.

Without the credit and without the anti-foreclosure pressure on banks, prices would be much lower than they are today. This is not an organic housing market recovery and we could see the bottom fall out next summer when the credit dries up and banks become more vigilant about getting homeowners to actually pay.


Anthony Randazzo is Director of Economic Research


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