Wednesday, June 01, 2011

No Pain, No Gain

Remember the last few years when the government was clambering to provide tax incentives to prop up the housing market? And remember at the time how knowledgeable people said that all this was going to do—beside waste more money we didn’t have to spend—was postpone the pain of a decline in housing prices that was both inevitable and necessary following the bubble that had been created in preceding years? Well, guess what? They were right. Housing Imperils Recovery; Home Prices Sink to 2002 Levels (WSJ-sub req):

Home prices have sunk to 2002 levels, effectively wiping out almost a decade's worth of home equity across the U.S. and imperiling the fragile economic recovery as Americans confront the falling value of their biggest investment.

A closely watched home-price index released Tuesday, the S&P/Case-Shiller National Index, showed that prices nationwide fell 4.2% in the first quarter after declining 3.6% in the fourth quarter of 2010. The index had seen increases in 2009 and early 2010.

"Home prices continue on their downward spiral with no relief in sight," said David M. Blitzer, chairman of S&P's index committee. The report signals "a double dip in home prices across much of the nation," he said.

That doesn't bode well for the economy, which historically has depended on home buying and other consumer spending to rebound. Falling prices hurt economic growth in a number of ways. Not only do homebuyers curb spending when their homes are losing value, but continued price erosion keeps families stuck in homes they can't sell because they are worth less than what they owe.

In reality, this isn’t truly a “double dip” as the only reason that prices rose for a short period of time was due to government intervention. That intervention couldn’t last forever and once it was over the U.S. housing market resumed its natural slide. With a few exceptions, housing markets are depressed across the country:

Indeed, 12 of the 20 metropolitan areas tracked in the index posted new lows in March. Only the Washington, D.C., and Seattle markets saw month-to-month growth of 1.1% and 0.1%, respectively. Minneapolis led the declines, with prices falling 3.7%; on an annual basis, its prices were down 10%.

It was a brutal winter here followed by a late arriving and disappointing spring. Our professional and collegiate sporting teams are in various stages of disaster and disarray. And we now lead the country in declining house prices. No wonder T-Paw would rather spend time in Iowa and New Hampshire.

The biggest problem with the government attempting to artificially inflate housing prices for a short period of time is that it merely prolonged the length of time we have to wait for a true turnaround in prices to occur. And news that we haven’t hit bottom yet on house prices imperils the already sputtering economic recovery. The stock market was off dramatically today because of concerns with housing. A depressed housing market, fragile consumer confidence, and tepid growth in jobs are indicators that a tough road lies ahead for the economy for the remainder of 2011.