People love to beat up on the NAR, which has never seen a housing report it didn’t like. And they usually have good reason to do so.
On Friday, for example, the NAR went bananas about seasonally adjusted September home sales, which most people agree were goosed by the soon-to-expire $8000 first-time-buyer gift credit. (Remember what happened to car sales during the weeks leading up to the end of Cash For Clunkers…and then what happened afterward?)
Barry Ritholtz sprays the NAR with abject ridicule each month, and this time he went so far as to accuse them of “bullshitting America.”
Calculated Risk is more restrained, but equally devastating.
Federal subsidies are now encouraging people to buy houses instead of rent them. The unintended consequence of this policy is that this is leading to more rental vacancies, which is putting pressure on rents (because the subsidies don’t expand the need for housing). As rents fall, renting will get more attractive. And house prices will have to fall further to become relatively atttractive again.
Calculated Risk is also appalled (as we are) by how the home-buyer credit plus FHA loans is encouraging the same irresponsible borrowing that blew the bubble in the first place.
The distressed sales activity [in the housing market] is a necessary step towards a healthy market, but the burst in activity associated with the “first-time” home buyer tax credit is “mistaking activity for achievement”.
NAR chief economist Lawrence Yun argued this morning: “[W]e need a steady supply of qualified buyers to meaningfully bring inventories down …”
Mr. Yun is making two obvious mistakes. First he is narrowly defining “inventories” as just inventories of existing homes. The total housing inventory includes existing homes, new homes, and rental properties.
If we think of a balloon that contains existing home inventory and vacant apartment units, the tax credit is like pushing a finger on the balloon – the indent makes the balloon look smaller, but the volume of the balloon remains the same (the decline in existing home inventory is offset by an increase in vacant apartments).
Note: there is some reduction in overall inventory as new households are formed, but not from incentivizing renters to become owners.
The higher rental vacancy rate is leading to lower rents, so the buy-or-rent decision will favour renting once Congress removes their finger from the balloon.
Yun also appears to be suggesting that the first-time home buyer tax credit is providing a “supply of qualified buyers”. This is bubble type thinking. Did all the exotic loans during the housing bubble provide a “supply of qualified buyers”? Those buyers qualified for the loans, but they were not really ready for homeownership.
The same is true for buyers today obtaining FHA insured loans and using the $8,000 tax credit as their downpayment. Imagine a $200,000 purchase with no money down (except the tax credit). What happens in three or four years when the homeowner wants to sell? The transaction costs will be around $15,000 (about 7.5%) if they sell for the same price.
So a homeowner, who has been unable to save a down payment so far, will be expected to make a $15,000 down payment in arrears? I don’t think so.
Oh wait. Haven’t prices fallen significantly? Shouldn’t prices just go up from here? Yun says we are returning “to a period of normal, steady price growth”. So the homeowner can use their appreciation to pay the transaction costs? That is more bubble type thinking. Prices may go up. Prices may fall further. Loans should not be predicated on asset prices increasing.
“The next mistake will be a new way to make a loan that will not be repaid.”
William Seidman, “Full Faith and Credit”, 1993.
Allowing buyers to use the first-time home buyer tax credit as a downpayment is “the next mistake”.
Here’s Calculated Risk’s analysis of the home-sales numbers: Existing Home Sales Increase in September