WHAT HAPPENS WHEN THE GOVERNMENT STOPS PROPPING UP THE HOUSING MARKET?

As we all know by now government spending and the Fed’s liquidity programs have provided a substantial boost to the economy.  Some would argue that these government programs are simply delaying the inevitable and masking over the real problems in the system.  According to Annaly Capital Management, these programs are having an especially profound impact on the housing market.  As we’ve often argued, many of these programs are nothing more than grandiose wastes of taxpayer dollars and do nothing more than kick the can down the road while adding substantially to the debt burden of the future.  After all, this short-term painkiller does nothing to actually attack the long-term cancer that is plaguing the economy (it’s the debt, stupid!).  Evidence of this false recovery is found perfectly in last months housing data as the government nearly let the homebuyers tax credit expire:

We love the daily “event” of data releases.  On most mornings, you can look around our trading desk and gaze upon a sea of Bloomberg terminals all pointed to the ECO screen, the economic release calendar showing the estimates and actual of each data point to be released that day.  On 11/19/09, a data point showed up on the screen that we hadn’t really paid attention to before:  RPX Composite 28dy Index.  It came in at 193.96 for September 17, versus 200.29 in the prior period.  We didn’t know what any of that meant, but we are always in search of new data to track, so we went digging.  As it turns out, it’s pretty interesting.

The data comes from Radar Logic, so we’ll let them explain in their own words what the numbers are:

Radar Logic is a technology-driven data and analytics business that produces a daily “spot” price for residential real estate in major U.S. metropolitan areas.

Data are captured from public sources and translated into the Radar Logic Daily^TM Prices for 25 U.S. Metropolitan Statistical Areas (MSAs), the Manhattan condo market, and a 25-MSA composite.  The prices reflect the actual prices paid for residential real estate on any given day and are computed using proprietary and transparent algorithms.

The 28 day index that we are looking at represents prices over the 28 day period ending September 17.  The index measures price per square foot.  There’s obviously a bit of a lag since we are just now getting September prices, but that’s fine because this particular time period is an interesting one.  The National Association of Realtors (NAR) had been on a campaign to keep potential users of the new homebuyer tax credit from missing the cutoff date.  All of the following quotes from NAR press releases are from NAR President Charles McMillan:

• 8/21/09 – potential homebuyers “should try to make contract offers by the end of September”
• 9/24/09 – “buyers have little time to act”
• 10/1/09 – buyers “must make a contract offer very soon to have a reasonable chance of qualifying” for the credit

Based on the urgency of the message (Mr. McMillan is a practicing realtor himself in Texas), we’re guessing that the vast majority of buyers planning to use the credit had already made their offers by the end of September at the urging of their realtor.  Below, we take a look at the new housing recovery by graphing the Radar Logic price-per-square foot with another recent data point that disappointed, new single family housing starts.

Interestingly enough, prices have already begun to fall by mid-September after a sharp rise following the initiation of the $8,000 first-time credit.  This is starting to remind us of another chart showing what happens when the government steps away.  The extension and expansion of the tax credit wasn’t approved by Congress until 11/5/09, so there was at least 1 month (October) of housing activity that we would call “normal”, unmolested by incentives.  It should be instructive to watch data releases for this month.  But alas, September data are still trickling in.  Our ECO screen tells us that next week we get  S&P/Case-Shiller and FHFA housing data for September.  Don’t worry, the housing market stimulus is back in effect until April 2010, so we won’t have to worry about the housing market until then.

Source: Annaly Capital Management