No Double Dip for Housing
Despite a severe winter housing setback, the recovery in housing remains intact, and a more uplifting spring is likely to follow the dreary winter.
To be sure, worries are understandable. Virtually every measure of housing activity has followed the same trajectory over the past year: bottoming last spring, rebounding over the summer and fall, then collapsing over the winter. While the broadest measures of sales and construction activity haven’t retested last spring’s lows, the risk certainly looms. And while most measures of home prices continue to eke out modest gains, the rate of appreciation has definitely slowed in recent months. Indeed, pessimists see renewed evidence of decline after last year’s stabilization. According to Robert J. Shiller, author of Irrational Exuberance and co-creator of the Case-Shiller house price index, “I think there is a definite risk of a turndown again in home prices. If home prices decline 10% or 20% more, we are in big trouble.”
But the risks are overstated, for at least two reasons. First, at least some of the recent backsliding can be attributed to bad weather. Because housing is prone to seasonal swings, analysts go to great lengths to adjust for them. But when extraordinary events take place, as they recently have, the usual adjustments can fall woefully short. And according to the National Oceanic and Atmospheric Administration, this winter was exceptional -- colder and wetter than most.
A second reason to discount concern about the slow winter is the role Uncle Sam has played. Generous tax incentives offered to first-time home buyers expired on Nov. 30, prompting many to hurry up purchases before the deadline passed. Even though the government decided at the end of November to continue the incentives until the middle of 2010 and, in fact, expanded eligibility to previously excluded home buyers, the benefits of the incentives were largely exhausted and sales collapsed after the initial November deadline. Meanwhile, the benefits of the second round of incentives haven’t yet kicked in.
A springtime rebound ought to be just around the corner, if I’m right about the winter housing downturn being due to special factors. It’s too soon to say for sure, but tentative signs of an uptick are already emerging. According to the Mortgage Bankers Association, for example, home purchase applications increased in late February and early March, pushing them above the pre-blizzard levels of early February. And according to the National Association of Home Builders, builders’ sentiments ticked up in February to the highest level since November, on reports of improved single family sales and rising expectations for the next six months.
Can that rebound be sustained once federal supports are again removed? I think so. Tax credits to home buyers are slated to end midyear (April 30 for contract signing and June 30 for closing), and a surge-and-dip pattern in sales is likely as buyers once again race to beat the deadline, stealing sales from future months. That short-term maneuvering aside, there are reasons to expect gains in housing activity from other sources.
Most likely, credit conditions will ease by midyear. Lenders have been skittish about housing loans thus far, largely because falling house prices erode loan collateral and increase the risk of default. But as that perceived risk recedes -- and we’re betting that will be evident by midyear -- mortgage lending will begin to relax, adding further buoyancy to sales. If not, Uncle Sam is likely to return to the proven remedy: another round of tax incentives. After all, the current round of tax credits is the third such package in three years. And given the importance of housing to the economy, and the proximity in time to the November elections, policymakers won’t be shy about another set of inducements.