Debate over the future trends of US housing prices continues

Yesterday, a friend of mine and her family went apartment hunting in New York City.

While the heat wave in NYC had eased, the debate over the fate of housing prices across the US is increasingly heating up.

In what way objective analyses, policy goals and old fashioned interest group politics intermingle is increasingly hard to say.

Nevertheless, one must trudge through the thickets of contradictory information to make some sense of what's going on. Predictably, there are two schools of thought on this matter.

The upsiders: Investors like John Paulson — he who made off with $15 billion (Dh55 billion) by shorting the subprime mortgage-backed derivatives in connivance with Goldman Sachs, who sold the same derivatives to clueless banks in Germany and elsewhere — warned in April and May that housing prices would rise.

According to his estimates, on average, prices will rise by around 8 to 10 per cent in 2011 and by three to five per cent in 2010. Reuters quotes him as saying: "if you don't own a home today, now is the time to buy one".

This rhetoric and these estimates are predicated on the fundamental belief that US economic recovery is likely to gallop rather than amble around.

The downsiders: There are a lot of people arguing that the economic recovery is, in fact, not happening.

A possible chain of events, among many others, is as follows: with the economic downturn and reduced tax revenues, municipalities and local governments are increasingly unable to hire for, retain and create new jobs. This is over and above the retrenchment in employment figures and the persistent reality of jobless recoveries (in which case, economic output increases, but employment figures remain slumped) that haunts the US.

Any data indication that consumer spending is on the rise, is due to increased levels of housing defaults by consumers, who find that defaulting and then renting is better than continued payments on a house with diminished value when unemployment is around the corner. All in all, they say, economic recovery is unlikely with the speed that the upsiders are forecasting. And thus, the housing prices are unlikely to rise anytime soon.

Policy angle

There is a policy angle to this story, which has confused the trend. Since last year, governmental sop has been available to individuals making less than $225,000 (note, this addresses pretty much 95 per cent of the political voting class).

First time home buyers were to get credit for $8,000; and anytime home-buyers were to get a credit of $6,500. There are other such governmental programmes that have skewed the secular decline in home prices.

The result of these interventions, arguably, has "kept people in their homes", as the government argues. Resultantly, in the months prior to the expiry of such credit-programmes — in April/May — the housing figures had begun to rise.

The resultant media exhortation that normalcy is about arrive got much play.Yet, the reality is that the government had spent nearly $75-$100 billion in the Home Affordable Modification Programme (restructuring mortgage rates) to help individuals restructure their mortgages. As Yves Smith and others have pointed out, these programmes have even higher rates of default subsequent to the restructuring. In a bit of tricky causality, according to one narrative, those who really need help due to their debt-financed lifestyle end up being the ones who seek these mortgage restructuring programmes. But the same individuals with similar spending patterns and employment prospects end up defaulting, in any case. Whether this is an uncharitable view of many, including those who have suffered through job losses, is unclear. But, the financial writing is on the wall. The government has played its part to prop up demand and prices artificially, often at an indeterminate but oversized present and future cost to the taxpayers.

All of this leads us back to the original point: Where are the housing markets headed? As this writer has often stressed, follow the political winds.

According to research, and I simplify it here, by Atif Mian et. al. at the University of Chicago they found that governmental programmes had lent in 2003-06 relatively more money for housing in low income areas (despite high default rates) in the Chicago area. Houses for votes, if one may caustically call it so. While the data today is yet to be analysed, one shouldn't be surprised if the governmental funds are directed towards low income individuals with unreliable banking history.

Whether their actions pan out of not in the recovery, one ought to see transient spikes in housing prices across parts of the US. But an upward trend is unlikely.

What is likely is that governmental spending is likely to stoke inflation fears, and thus gold prices. Is it then a surprise that astute investors like Paulson have bet selectively on housing price increases and wholeheartedly on rising gold prices.

They are, in essence, betting on the government to live up to their promise of being: short term smart and long term stupid.

The columnist works for a major European investment bank in New York City. You can follow his tweets at http://twitter.com/ks1729