A Double-Dip for the Housing Market?

Home prices have begun to fall again. The most recent report showing the housing market's decline came on Tuesday when the October data for the S&P/Case-Shiller Home Price Index was released. It indicated that in many areas, home prices have been falling since July. That's after prices appeared to be slowly rising for the year or so prior. This has caused some to declare that the housing market is experiencing a double dip. That isn't quite right.

Here's Alan Beattie and Robin Harding from the Financial Times expressing this concern:

The Case-Shiller measure showed house prices in six markets - Atlanta, Charlotte, Miami, Portland, Seattle and Tampa - hitting their lowest level since they began to fall in 2006 and 2007. "The double-dip is almost here, as six cities set new lows for the period since the 2006 peaks," said David M. Blitzer, Chairman of the Index Committee at Standard & Poor's, which produces the index. "There is no good news in October's report. Home prices across the country continue to fall."

And here's a chart based on the S&P/Case-Shiller Composite-20 Home Price Index that shows what's going on:

case shiller 2010-10.png

This index is based on housing prices in twenty major cities. As you can see, on average, they have been declining recently. They're even beginning to near their May 2009 low, though they aren't there quite yet. Isn't this a double dip?

That may be one way to characterize this trend, but it there's a more direct way to explain it. Prices began to stabilize and rise in June 2009. That's just when the market began to feel the effect of the home buyer credit's influence. It was included as a part of the giant stimulus package passed in February. The rise in prices experienced for the following 14 months or so were all skewed by the home buyer credit. It distorted actual home demand as buyers rushed purchase homes at that time, although they otherwise they may not have considered doing so for a year or two. Consequently, prices rose.

Once that credit finally expired in May, prices began to quickly begin to decline again as well. But that decline wasn't due to something intrinsic about the housing market or U.S. economy changing; it was government policy-driven.

Instead, let's imagine a world in which that home buyer credit had never existed. The chart above would have looked much different. You would have instead seen a housing market where prices continued to decline after May 2009. How long would they have kept falling? It's hard to tell, but there's little doubt that they would have, because there wouldn't have been a government program in place to pull forward future home buying demand.

So really, what we're seeing now isn't a double dip, but a delayed continuation of the home price reset that began in 2007. The home buyer credit never allowed the housing market to hit its natural bottom. Now that it is not longer in place, prices can decline to reach a stable floor.