I read this post from Jacob Roche about what has happened in housing since the tax credit expiry. There are a couple of surprising aspects to what we’re seeing so far. First, a look at prices (emphasis, mine)
What I found was that on both a raw and population-weighted basis, prices increased after the tax credit expired, by about 5% in both measures. Most interestingly, on a dollar basis, prices increased by a raw $9,766.77 and a population-weighted $5,280.89 — very close to the $8,000 credit. This is extremely counter intuitive. If the tax credit expiration effectively raises all home prices by $8,000, why would sellers raise their prices roughly another $8,000, and why would buyers agree to it? In some areas, like New York, DC, and San Francisco, prices increased by the tens of thousands. Also interesting is that some of the biggest price declines occurred in Texas, although removing Texas from the population-weighted data changes the average by only a small amount — the biggest percentage decliner in the list is in Texas, but it’s also the smallest city in the list.
The post goes on to look at the sale data (again, emphasis is mine):
Number of sales gives the data another dimension however. Roughly three-fifths of the cities in the list saw fewer sales post tax credit, and the declines in sales were generally much steeper than any of the increases. It’s regrettable Trulia doesn’t give the exact numbers, making it difficult to estimate how much money is flowing in or out of the market, but one could at least make a rough guess that the price increases are being offset by fewer sales. Interestingly, a couple of the cities with declining prices saw increased sales.
Now I have some theories about this behavior, purely using intuition and my own read of buyer and seller psychology. On prices, I think the sales price increase is a sign sellers know the market is not as liquid now as it was with the tax credit. So as a result they’re looking to maximize the price paid. I would’ve thought prices would’ve been higher under the tax credit because both buyers and sellers would treat the credit as “found money.” What I mean by that is if you find money that you had no expectation of getting, you’re more likely to splurge – to spend on things you may not have thought of getting before, but since you have the cash you decide to get it anyway. Apparently it didn’t quite work out that way.
As for sales volumes, that’s not a surprise. We figured sales would be lower as the market becomes less liquid. And Jacob’s point about money flow is a good one. Because ultimately that’s what it’s all about. So when pundits talk about Case-Shiller price increases, my first question is how many sales-pairs made up the estimation? Fewer transactions at higher prices can still result in negative money flow.
Overall, I think the tax credit did more harm than good. Prices offered and prices bid are moving further away from each other, thereby resulting in fewer housing transactions which are actually done. The market is becoming more illiquid and the process will take that much longer to heal itself and for transactions to clear in a meaningful way. Plus, how much money was spent on this and did it get us the outcome we wanted?
Don’t think so…