Unsafe as houses
US housing: US housing is still central to the economic outlook. The 27 per cent plunge in the pace of existing home sales in July from a month earlier owes much to the expiry of a tax break. But real house prices are still as high as at the end of the 1997-2000 technology bubble, so their tentative recovery looks vulnerable to another significant leg down. That in turn could bring a second recessionary downturn.
The tax credit for homebuyers ended on April 30, making a drop-off in activity likely. But mortgage interest rates remain exceptionally low, and loans with low down-payments are still available through the Federal Housing Administration. So the decline in home sales activity to the lowest level this cycle – and in fact in 15 years – suggests the market is far from being in a healthy recovery mode.
With house prices having leveled out and even started creeping upward since the bust, the Case-Shiller 20-city home price index is up 47.3 percent since January 2000, in line with the 49 percent rise in consumer prices. And affordability, as measured by the ratio of house prices to income, remains close to its long-term average. Neither indicates housing is yet especially cheap, so a loss of momentum could easily send prices down again.
That makes it hard to tackle flaws in housing policy. Abolishing government guarantees, subsidies and tax breaks, and closing the housing finance behemoths Fannie Mae and Freddie Mac, would create a healthier market long-term – but moves in that direction could further depress prices in the short term. On the other hand, postponing reform perpetuates a false market, possibly deterring bargain-seeking buyers.
In any event, provoking further housing nervousness is risky when US consumers remain gloomy. More than 72 percent of them are very concerned about unemployment, according to a new Reuters/IPSOS poll.
Even so, trying to address this broader malaise with another fiscal stimulus would be unpopular, according to poll data, and potentially ineffective. Monetary stimulus, on the other hand, could rescue the situation – but at the risk of causing inflation, raising nominal incomes and shrinking real debt loads. That would hurt in the long run. But for politicians facing midterm elections in November, and perhaps for the recession-fearful Federal Reserve, it might be tempting to opt for short-term relief over long-term rehabilitation.