The Obama administration got a welcome piece of good news from the housing market, as existing-home sales surpassed expectations and rose 7.6% in April. Prices also rose, which would normally signal a recovery for both the existing and new residential markets. However, the nature of the temporary tax credit that gave the market its boost in April and the lack of long-term growth indicators makes this look more like an outlier than a harbinger:
Home sales surpassed expectations for April as government incentives provided a temporary boost to the housing market.
The National Association of Realtors said Monday that sales of previously owned homes rose 7.6 percent to a seasonally adjusted annual rate of 5.77 million. That was the best showing in five months and better than the 5.63 million units economists had expected.
The increase in sales sparked a rise in home prices. The median price for a new home rose to $173,100, up 4 percent from a year ago.
The federal government provided a big boost to home sales this spring by offering first-time buyers a tax credit of up to $8,000. Homeowners looking to upgrade were able to qualify for a credit of up to $6,500. The deadline for getting a signed sales contract was April 30.
That is the big fly in the ointment for the White House. Prices and sales jumped the last time a tax credit expired, too, followed by a sharp decline. The tax credit shifted demand from the near future to the present in both cases, artificially boosting the markets and creating a mini-bubble.
How do we know that this won’t last? Less than two weeks ago, these numbers were preceded by sharp declines in mortgage applications. In fact, that decline of 9.5% outstrips the gains made in the resale market (7.6%), even while mortgage interest rates fell again below 5%. Even though home prices rose in April, they began falling already; the CNBC report from May 12th noted that 10% of all properties on the residential market had reduced their asking price since May 1st.
We can probably expect Congress to try to reinflate the bubble through another extension of the homebuyer tax credits, perhaps even this week before the Memorial Day recess. Instead of constantly introducing volatility to the housing markets through artificial and temporary interventions, though, Congress could help repair the housing markets by addressing unempl0yment and the massive pricing signals they have sent to investors over the last 16 months of higher taxes, fees, regulations, and debt. Otherwise, the high rate of unemployment will continue to erode the value of housing and the ability of people to buy homes they can afford.