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U.S. housing may be heading for a double dip

By Daniel Casey

For nearly a decade, the U.S. economy rode skyrocketing housing prices to great heights. We know how that turned out: speculation, unwise investments and financial chicanery brought the markets back down to earth. With so many Americans still holding so much of their wealth in their homes, households look to the housing market for signs of hope in the economy as a whole. But despite some recent good news, house prices may be headed back down again, raising fears of a double dip in home values. Two closely watched measures of housing market activity, and the timing of a popular home-buyer’s tax credit, help explain why.

The first of the housing-market indicators is the simplest: housing starts. Every month, the Census Bureau contacts companies that hold permits to build new housing units and ask them if they’ve started digging a foundation. The number of housing starts is a measure of how many shovels have hit the ground, but that’s it. It doesn’t reflect if the house sells, or at what price, or even whether the builder manages to finish construction.

From the latest Census Bureau figures, housing starts are looking up. Adjusting for seasonal variations – after all, construction workers aren’t too keen on working outside in winter – 626,000 houses, apartments and condominiums were under construction in March. That’s 15.2 percent more than at this time last year, and 15.3 percent more than in February.

The other major measures of housing health are the S&P/Case-Shiller Home Price Indices, which are a bit more complex. Financial-data juggernaut Standard and Poor’s compiles two monthly indices on the prices of single-family houses: one based on sale prices in 10 metropolitan areas, and another based on 20. By comparing the different sale prices for the same house over time, the two Case-Shiller indices measure how much the value of houses go up or down each time they change hands, and boil it down to an average number for each urban region. These numbers don’t track house sales in rural areas, smaller cities or even some large ones – the indices include cities such as Miami, Las Vegas and Denver, but exclude others like Philadelphia, Houston and St. Louis. Multiple-unit properties, like condominiums and rental buildings, aren’t included in the picture, and neither are newly built houses.

With those limitations in mind, the most recent Case-Shiller indices show some mixed signals. There’s some modest good news; February 2010 sale prices were 1.4 higher than they were a year ago in the 10-city index and .6 percent higher in the 20-city index. Those are the first positive year-over-year figures seen since way back in December 2006, when the first rumblings of housing-market trouble began.

Seeking reassurance, but finding little

But the more immediate trends are troubling. Measured month over month, single-family house prices are continuing to decline, just not as precipitously as before. Six of the cities in the 20-city index have hit their lowest point yet from their peak in 2006 or 2007, and seven have seen house prices decline for at least six consecutive months. Only one of the twenty cities – San Diego – saw an anemic .6 percent increase in prices from January to February. Taken as a whole, the composite index for all 20 cities is 30.3 percent lower than it was at its peak of July 2006.

How analysts view these figures seems to vary with how effective they think that the federal housing-purchase tax credit has been. Introduced by Congress in 2007, and extended twice since, the credit expired for good on April 30, generating a rush of first-time home buyers and buoying both housing starts and resale prices. Casey Mulligan, economics professor at the University of Chicago, doesn’t even mention the tax credit, hailing the increase in housing starts as evidence of renewed strength in the market and rejoicing that “the housing recovery continues.” Lawrence Yun, chief economist for the National Association of Realtors, strikes a more cautious tone, calling the tax credit a “resounding success,” but one that has achieved only a “broad stabilization in home prices.”

Mulligan’s sunny outlook and Yun’s tempered optimism stand in contrast to those who think that the tax credit has provided only a temporary boost to a market whose fundamentals remain weak. S&P chief economist David M. Blitzer sees “a risk that home prices could decline further before experiencing any sustained gains.” Unemployment appears to have peaked in late 2009, but only just, and history indicates that it will take several quarters after unemployment begins to come down before housing picks up in response. Even Robert Shiller, a co-creator of the index that bears his name, admits that “almost the whole [housing] market now is government” and a new drop in prices has “substantial probability.”

So there’s not much reassurance to be found in either housing starts or the Case-Shiller index, and a double dip may be on the way. The numbers aren’t quite as low as they were at the bottom of the trough, but there’s little to indicate that their current slight rise will be sustained. With the federal government reluctant to take on additional stimulus measures or offer new tax breaks, housing seems set to slump anew.

Daniel Casey is an urban planner and a news junkie who writes the blog

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