August 30, 2012

Housing Bulls Living in ‘Fantasyland,’ Economist Says

Despite encouraging signs, housing has not yet hit bottom, Anthony Randazzo writes

Don’t believe the hype. That’s the message Anthony Randazzo, writing at RealClearMarkets.com, delivered Thursday about the housing market. Randazzo, director of economic research at the Reason Foundation, quotes from a number of media and government sources about how “the skies are clearing. And the sun is shining. And all is going to be well with the world,” when it comes to the housing market, before debunking the premise, saying any glimmer of recovery has happened only in "fantasyland."

“The reality is that we are not at the bottom of this housing bust,” Randazzo writes. “And this is important to understand because the economy is not going to recover until housing prices are at their bottom, with toxic housing debt cleared off the balance sheets of households, financial institutions, and the federal government's bailout bucket.”

He concedes that all 20 cities that are tracked by the S&P/Case-Shiller index saw home values increase in June by an average of 2.3%. The National Association of Realtors also reports that existing home sales in July grew 9.4% year over year. Heck, Census Bureau data show new home sales jumped an “eye-popping” 26% in July from the previous year's numbers.

But, he adds, such short-term increases have happened before, without leading to a full-blown housing recovery.

“For instance, the same Case-Shiller index saw increases from May 2009 to May 2010, only to resume its previous free fall with a vengeance,” he argues. “This period too was hailed as the bottoming out of the housing market. But the optimists failed to account for the effects of the First-Time Homebuyers Tax Credit that gave up to $8,000 to households as incentive to buy a home, pulling demand from the future into the present. Once that credit expired in mid-2010, prices began to fall again past the previous low.”

This time around, Randazzo writes, the cause of the uptick is that there were fewer foreclosures being processed over the past year which, thanks in part to the robo-signing scandal, has effectively taken existing housing supply off the market. But millions of these delinquent properties will be going through foreclosure and be coming on the market at some point, reversing the price trend currently enjoyed.

“Optimists counter that distressed home sales where homeowners want quick access to cash have slowed considerably, indicating that the foreclosure inventory is not that deep,” he concludes, before adding “We are currently in a drifting cycle where pressures to prop up housing have the market only slowly trending downward with occasional upward price swells like we are experiencing now, only to trend back down again.” 

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