by Calculated Risk on 10/27/2009 01:53:00 PM

From the NY Times: The Case for More Stimulus. Excerpt:

... Washington is not providing a coherent plan for effective stimulus. The Senate has been hamstrung for nearly a month over the most basic relief-and-recovery boost: an extension of unemployment benefits. The Obama administration has called for an expensive crowd-pleaser of dubious effectiveness: sending every Social Security recipient an extra $250.
...
Other measures being floated are less effective than unemployment benefits and aid to states. Many of the $250 checks to Social Security beneficiaries will not be spent quickly, because many recipients have no pressing need for the extra money. Proposals by some lawmakers to extend and expand the $8,000 tax credit for first-time homebuyers are even less well targeted. Since it was enacted in February, only an estimated 15 percent of buyers who claimed the credit needed the money to make the purchase. It’s not stimulus when you pay people to do something they would have done anyway. It’s waste.
emphasis added

It is hard to understand why the next round of stimulus should include any extension of the home-buyer tax credit. It has a minimal impact on unemployment, it is poorly targeted, and as the NY Times notes "It's waste".

Meanwhile, the AP is reporting of potential "massive" teacher layoffs in Arizona, and Tom Abate at the San Francisco Chronicle reports the underemployment rate in California is 21.9%: Underemployed compound state's jobless troubles:

The state Employment Development Department estimates that this underemployment rate hit 21.9 percent in September.

That figure includes 1.9 million jobless Californians, 1.4 million people who had to work part time, and 865,000 adults loosely described as discouraged.

"Underemployment is at the highest level since we started keeping these records in 1994," said economist Sylvia Allegretto of the Institute for Research on Labor and Employment at UC Berkeley.

The best help for the housing market is reducing unemployment and thereby encouraging new household formation. New household formation is always low during a recession as people double up or move into their parent's basements. Once these people become confident in their employment prospects, they will be looking to move out of the basement - excluding of course Matthew McConaughey's character in "Failure to Launch".

Note: Reuters has more on the current status of the tax credit: Where's Home-Buyer Tax Credit Headed in the House, Senate?

Lawmakers in the Senate are debating whether to extend it, or even expand it, and a vote could come as early as Tuesday. The House, which would also need to approve the measure, has yet to act.

by Calculated Risk on 10/27/2009 10:35:00 AM

This following graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Case-Shiller Composite 10 Index (SA), August: 156.4

Stress Test Baseline Scenario, August: 145.6

Stress Test More Adverse Scenario, August: 135.5

House prices are 7.4% higher than the baseline scenario, and 15% higher than the more adverse scenario.

There were three key economic stress test parameters: house prices, GDP and unemployment. Both house prices and GDP are performing better than the baseline scenario, and unemployment is performing worse than both stress test scenarios.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph through August 2009 using the Case-Shiller Composite Indices (SA):

Click on image for larger graph in new window.

This graph shows the price to rent ratio (January 2000 = 1.0) for the Case-Shiller composite indices. For rents, the national Owners' Equivalent Rent from the BLS is used.

At the peak of the housing bubble it was obvious that prices were out of line with fundamentals. Now most of the adjustment in the price-to-rent ratio is behind us. It appears the ratio is still a little high, and I expect some further decline in prices - especially with rents now falling.

The BLS reported for September:

The increase [in CPI] occurred despite declines in the indexes for rent and owners' equivalent rent, the first decreases in those indexes since 1992.

The decrease in OER was at an annual rate of 1.7% and based on media reports, and apartment surveys, it appears rents will continue to decline for some time. This will push up the price-to-rent ratio unless house prices fall.

Note: some would argue the price-to-rent ratio being a little too high is reasonable based on mortgage rates and "affordability".

by Calculated Risk on 10/27/2009 09:15:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for August this morning.

This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted data - some sites report the NSA data.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 32.5% from the peak, and up about 1.0% in August.

The Composite 20 index is off 31.3% from the peak, and up 1.0% in August.

The second graph shows the Year over year change in both indices.

The Composite 10 is off 10.7% from August 2008.

The Composite 20 is off 11.4% from August 2008.

This is still a very significant YoY decline in prices.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in 16 of the 20 Case-Shiller cities in August.

In Las Vegas, house prices have declined 55.6% from the peak. At the other end of the spectrum, prices in Dallas are only off about 4.8% from the peak - and up in 2009. Prices have declined by double digits from the peak in 18 of the 20 Case-Shiller cities.

The debate continues - is the price increase because of the seasonal mix (distressed sales vs. non-distressed sales), the impact of the first-time home buyer frenzy on prices, less supply because of modifications and the general slowdown in the foreclosure process, or have prices actually bottomed? My guess is we will see further house price declines in many areas.

I'll compare house prices to the stress test scenarios soon.

by Calculated Risk on 10/27/2009 09:10:00 AM

From MarketWatch: U.S. home prices rise 1.2% in Aug.: Case-Shiller

The market value of U.S. homes in 20 major cities rose by 1.2% compared with July [not seasonally adjusted] ... In August prices rose in 17 of 20 cities

Just headlines ... I'll post graphs after the data is released online.

by Calculated Risk on 10/27/2009 08:18:00 AM

While we wait for the August Case-Shiller house prices ...

Simon Johnson and James Kwak write in the WaPo: The home-buyer tax credit: Throwing good money after bad.

What happens when you artificially prop up housing prices? Imagine the credit were expanded to all home buyers and made permanent. This would simply boost housing prices at the low end of the market by close to $8,000, since all buyers would be willing to pay $8,000 more. (Prices would rise by a little less than $8,000 because at higher prices, more people would be willing to sell.) Whom does this benefit? Not first-time home buyers. It benefits people who already own houses (and their real estate agents) because it's a one-time boost in housing values. This would be just the latest chapter in a long history of government policies to boost housing prices -- the mortgage interest tax deduction, the capital gains exclusion on houses, the extension of the mortgage interest tax deduction to second houses, etc. Each of these policies pushes up prices just once; if you want to keep pushing up housing prices, you have to keep adding sweeteners.

A temporary tax credit has a similar effect, but for a shorter period of time. It boosts the price of a transaction that would have happened anyway. It may create additional transactions, but is that a good thing? If someone could not have afforded a house without the tax credit, then what is he or she going to do when the tax credit goes away and the price of the house falls? In effect, the tax credit is a way of making houses temporarily affordable that would not otherwise be affordable, and we know where that leads.
emphasis added