November 23, 2009

According to the National Association of Realtors (NAR) in October existing home sales rose 10.1% from September levels.  Relative to October of last year housing sales were up 24%.  These are impressive gains in an environment characterized by 10%+ unemployment.

Even NAR recognizes the source of the improvement though.  The Government's "Cash for Condos" program was originally set to expire on November 30, 2009.  While the initiative has since been extended, the fear of missing out on "free Government money" generated a flurry of sales activity as pent-up demand and fence-sitters were drawn into the market and planned future transactions were pulled forward into October.

The problem is that house prices continued to plummet despite these extraordinary subsidies.  The median sales price was down 1.6% from September and 7.1% year-over-year.  Even in an environment where the Government is paying people to buy homes, prices are collapsing. 

Most of the benefit from the $8,000 tax credit has already been realized and the program will begin to be phased out in April 2009.  The Federal Reserve's mortgage rate subsidy will soon be exhausted and rates will rise materially.  We have also entered the winter months when home prices typically fall due to seasonal factors. 

The housing price correction will continue.  But this time it will be aided by lapsing Government intervention which means fewer home buyers, higher mortgage rates and additional foreclosures on the market.  Those who bought in to the Summer's purported housing recovery or were expecting housing prices to rise in 2010 are going to be disappointed.