There was supposed to be some good news amidst the dismal report card the U.S. real estate market got last week. On average, houses have lost a third of their value since their peak in 2006. Blighted Detroit has seen home prices fall to half their old level, and overbuilt Las Vegas is off by 60 percent. Standard & Poor’s Case-Shiller index showed that home prices are falling again, at their fastest rate since the days of the financial crash. Minneapolis real estate has lost 10 percent of its value over the past year.
The good news is that these declines were “widely anticipated.” But all this means is that there is a two-month lag between most housing statistics and those of Case-Shiller, whose latest numbers date only from March. It decidedly does not mean that anyone in the government has a clear idea of how the real estate market works or a sense of what it will do next.
We can tell this by looking at the First Time Homebuyer Tax Credit, which stabilized the market for a while between 2008 and 2010. Its withdrawal is being blamed for the new softening of home prices. The tax credit was launched in 2008 as part of the Housing and Economic Recovery Act that President Bush signed a little more than a month before the collapse of Lehman Brothers. HERA offered a $7,500 tax credit that took the form of an interest-free loan, to be paid back in 15 installments of $500 each, after a two-year grace period.
The Obama administration saw much to like in this Bush administration plan. In January 2009, a new version of it, expanded to $8,000 and turned into a government gift rather than a loan, became part of the stimulus bill. We know, in retrospect, that the basic pre-crash mistake of the Clinton and Bush administrations was to use financial incentives to drive the rate of homeownership far above its natural level. Responsible plans for righting the country’s fiscal ship should probably start with removing those incentives, wherever they may be found.
But presidents don’t think in crises—they reach for solutions that are already on the shelf. The Bush tax credit became the Obama law and has since added about $20 billion to the budget deficit. But it has cost homeowners a good deal more than that. Consider Minneapolis, with its 10 percent fall in home prices. Anyone who used the tax credit to buy a house worth $80,000 will have lost the full $8,000 of the tax credit, assuming the 10 percent decline is valid across all house valuations.
And unfortunately, it is not. Look at the invaluable housing-market website Zillow, run by the economist Stan Humphries, and you will see that the situation is considerably worse than the Minneapolis example would imply. Zillow differentiates between upmarket and downmarket housing. Nationwide, Zillow estimated this spring, there was an 8.2 percent drop in home valuations. But the top tier of houses lost only 4 percent of their value, the middle tier lost 9 percent, and the least desirable part of the housing stock lost 14 percent. Had you bought an $80,000 house in Minne-apolis, your house would likely have lost not $8,000 but at least $11,200, and probably more. That is, you would have lost the whole value of the federal tax credit, and thousands more besides.
You can see why the market for poor people’s homes might be weaker than the market for rich people’s. The less well-off get punished on both the supply side and the demand side. On the supply side there is an overhang of about 4 million homes that have either been foreclosed on or are severely delinquent. Of these about 2 million are foreclosed properties, according to Zillow. (A Wells Fargo expert quoted in the Washington Post puts the figure somewhat higher, at 2.2 million.) On the demand side, almost every month sees a retreat in the percentage of homes that are owner-occupied. It reached close to 70 percent in the middle years of the Bush administration. It now stands at 66.2 percent, roughly where it was midway through the Clinton administration. One can assume that poorer buyers are leaving the market disproportionately.
This is how we know that this recent collapse in house prices was not anticipated, at least not by anyone in a position of authority. Right now, the real estate market is a mighty engine of regressivity. The government, following its familiar model, has used an $8,000 tax credit to lure the poor into the market and saddle them with an asset that is rapidly losing value.
This is a model that goes beyond real estate. It was also the philosophy of the cash-for-clunkers program. At vast expense, the government creates a tiny bit of consumer demand that fizzes and sparkles for a few months and then disappears without leaving a trace—except in the federal deficit.
Christopher Caldwell is a senior editor at The Weekly Standard.