Economy Shock

The Good

MB: The Rasmussen Consumer Index, which measures the economic confidence of consumers on a daily basis, increased by two points on Tuesday to 77.9. That’s down two points from a week ago and down three points from the level measured a month ago. Still, Consumer confidence is up 18 points since the start of the year, providing further evidence of economic improvement.

Contract activity for pending home sales has risen for six straight months, a pattern not seen in the history of the index since it began in 2001, according to the National Association of Realtors®. In addition home prices in 20 U.S. cities rose in August for the fourth consecutive month, bolstering the case that an economic recovery is at hand.

The Bad

MB: Congress and the administration are likely to extend the first-time-home-buyer tax credit. Simon Johnson and James Kwak of the Washington Post suggest that this is a bad idea and I agree with them. Advocates of the tax credit main argument is that it will stimulate the economy and stabilize the housing market.

From the Article: The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway). According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.

Even at a price of $43,000, what are we getting? Given that these are first-time home buyers, and given the glut of homes on the market, most of these are financial transactions where a house changes hands in exchange for cash (and additional transaction costs). The $43,000 is not being invested; it isn’t buying anything for the public, like a new road. It’s just cash going into people’s pockets.

Putting cash in pockets does have a stimulative effect because some of that cash will turn into consumption. But as far as stimulus measures go, it has a low multiplier (the ratio of new economic activity to stimulus spending).

But the tax credit stabilizes the housing market, people say. What does this mean? It means that the credit keeps housing prices artificially high. But housing is something that all people need. Why do we want it to be expensive? Would we want government policies that artificially push up the price of food? (Wait, we have some of those already . . . but that’s a matter for another column.)

As of July, the real price of housing, according to the Case-Shiller Composite 10 Index (adjusted using the consumer price index), was still 20 percent higher than in January 2000 and more than 30 percent higher than its average for the entire 1990s. Now, there is a risk that a weak economy can cause housing prices to fall well below their long-run average. However, housing prices appear to have stabilized, at least for now, and at too high a level. That is in part due to the tax credit, in part due to the partial economic recovery we are witnessing.

The Ugly

MB: Is there any hope of improvement for the Detroit housing market? Some may argue and evidence suggests that the housing market is getting better throughout our nation; however this is not the case for Detroit which is a urban wasteland. To further support the notion of a wasteland Detroit recently held a public auction for roughly 9,000 homes and lots in various conditions of abandonment and decay. Even with minimum bids starting at $500.00 the auction was a huge flop; less than a fifth of the Detroit land was sold after four days of auctions.

Sources: http://news.yahoo.com/s/nm/20091025/us_nm/us_usa_housing_detroit

http://www.realtor.org/press_room/news_releases/2009/09/record_roll

http://online.wsj.com/article/SB125664877982310163.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

http://www.washingtonpost.com/wp-dyn/content/article/2009/10/27/AR2009102703791.html

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