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Eye on the Economy: Tax Credit Stimulates Housing as Expected
 Recent housing data — including a rise in existing home sales and a decline in the new-home sales pace — demonstrate the stimulative power of the first-time home buyer tax credit.
As the Nov. 30 deadline for the tax credit drew near, data from the third quarter of 2009 was especially compelling in showing the credit’s impact on the housing market. Knowing that they needed to settle soon in order to qualify for the credit, first-time home buyers helped push existing home sales to a seasonally adjusted annual rate of 4.9 million in September, their strongest monthly pace since July 2007. That helped boost quarterly existing home sales by 45% over the second quarter.
Existing home sales are registered at the time of settlement, and with more closings by first-time buyers of those homes coming up in October and November, existing sales should hold steady at around the third quarter average for those months. Only December and beyond will reveal the extent of an expected decline in existing home sales if the tax credit is eliminated.
Unlike existing home sales, new home sales are recorded when a contract is signed and the deposit is made. Since it generally takes five months to build the average house once ground is broken, buyers who wanted to purchase a newly-built home and take advantage of the Nov. 30 deadline would have had to purchase a completed or nearly completed home from a builder’s inventory before September. Under normal circumstances, closing on a house typically takes between 30 and 60 days, and current reports suggest that the process is taking even longer today.
New Home Sales Drop in September
The Commerce Department reported that new single-family home sales fell 3.6% in September to a seasonally adjusted annual rate of 402,000, down from 417,000 the month before, leaving sales 7.8% below their September 2008 pace of 436,000.
The drop in new home sales undoubtedly reflected the effect of the looming expiration of the first-time home buyer tax credit. Without extension — and preferably expansion — of the tax credit, new home sales are likely to sink further, with existing home sales expected to follow a similar pattern beginning in December.
New Home Inventories Continue to Improve, But Demand Remains Weak
For 29 consecutive months, home builders have been doing what they need to do in the face of weak demand by reducing their inventory of unsold homes.
New home inventories peaked at 572,000 in July 2006. In September 2009, they were down by more than half to 251,000, the lowest level since November 1982.
There was a 7.5 months’ supply of unsold homes in September, down from an all-time of 12.4 months in January of this year. The inventory has declined by almost 100,000 additional units from the 340,000 new homes on the market in the first month of the year, which in healthier times would have been a near-normal level.
That the months’ supply was running at a somewhat elevated level in September when the inventory was below normal levels clearly indicates that the major problem facing the housing market is no longer oversupply, but weak demand.
On top of this, even in places with steady sales, builders are experiencing difficulty in lining up production credit. Builders cannot replenish their inventory because financial institutions, their traditional source of credit, have shut their doors to residential construction. Bolstering demand and fixing the regulatory overkill are keys to reviving the housing market and moving the economy out of recession.
Housing Prices Increase — for the Moment
The S&P/Case-Shiller 10- and 20-city seasonally adjusted house price indexes increased in June, July and August. Although both measures are still down on a year-over-year basis, 10.6% and 11.3%, respectively, their rate of decline has decreased in each of the last seven months.
In August, 16 of the 20 cities in the 20-city index saw house prices increase on a seasonally adjusted basis. The turnaround in house prices appears to be largely due to the first-time home buyer tax credit helping to stabilize and bolster demand.
Sales of new homes priced under $200,000 rose from a low of 33% of all new home sales in the first quarter of 2007 to 40% in the fourth quarter of 2008, a natural increase during recession when first-time home buyers tend to account for a larger percentage of purchasers. In the third quarter of 2009, the market share of first-time purchasers jumped to 48%, up from 41% in the second quarter, a clear indication of the impact of the first-time home buyer tax credit.
The evidence suggests that by supporting demand, the tax credit has helped to break the downward spiral in house prices that has been feeding into soaring foreclosures. Rising foreclosures, in turn, have been exerting additional downward pressure on prices, inducing yet more foreclosures. Expiration of the tax credit could undermine demand and put more downward pressure on house prices and rising foreclosures, starting the cycle again.
Housing Starts Rise in September, But Building Permits Plummet
Housing starts rose a modest 0.5% in September to a seasonally adjusted annual rate of 590,000, up from 587,000 in August. The rise was powered by strong single-family starts, which rose 3.9% from 482,000 to 501,000.
The increase in single-family starts reflects the continued increase in the share of starts built for the owner. In more normal periods, about 20% to 25% of all single-family starts are built on the owner’s land or built by the owner as the general contractor. That percentage declined as speculative sales rose in the mid-2000s, but it has since grown beyond historic levels as building for-sale dropped off.
Builders can finance their construction through home buyers who have been drawn into the market by bargains and low interest rates. In the most recent Census report, 30% of the starts fell into this category.
Meanwhile, multifamily housing starts fell from 105,000 in August to 89,000 in September at a seasonally adjusted annual rate. Notoriously volatile when measured on a monthly basis, multifamily production averaged 94,000 units in the third quarter, down from 115,000 in the second quarter and 169,000 in the first.
The inability of developers to obtain financing for new projects, a shadow inventory of single-family homes for rent and low demand because of job losses are the major factors weighing down multifamily construction. Multifamily starts are projected to remain in the doldrums at least until mid-2010.
Following five months of steady increases, single-family building permits fell 3% from 464,000 in August to 450,000 in September at a seasonally adjusted annual rate. Again, the looming expiration of the first-time home buyer tax credit is the most likely explanation for the decline.
Multifamily building permits rose to 123,000 in September, up from 116,000 in August, their second monthly increase in a row. Despite this upward trend, multifamily permits averaged 113,000 in the third quarter, down from 123,000 in the second quarter and 170,000 in the first.
Builder Confidence Erodes in October
Another signal that the housing market faces a rough road ahead is coming from the NAHB/Wells Fargo Housing Market Index (HMI) measure of builder confidence. The HMI, after inching upward for three consecutive months, fell one point in October to 18. All three components of the index — current sales, current traffic and sales expectations — were down. The downturn in the HMI seems to be due to the expiration of the first-time home buyer tax credit.
In the face of a weak economy, continued job losses, tight credit conditions for consumers and businesses and questionable appraisals in many areas of the country, the housing market has many impediments to overcome.
Clearly, surmounting these negatives will be significantly more difficult in the absence of the home buyer tax credit.
Expiration of the tax credit promises to push residential construction down again, putting an additional weight on the struggling national economy.
NAHB Chief Economist David Crowe analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his Oct. 30 edition. To subscribe to “Eye on the Economy,” click here.
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