October 2009 was the 16th consecutive month of increasing year-over-year home sales and the strongest October since 2006. However, the volume of sales was still 9.5% lower this October compared to the average October figures.

The increase in sales can be attributed to:

  • the many short sales entered into over the summer which are only now closing and being tallied by data aggregators;
  • the first-time buyers who rushed into purchases to take advantage of the tax credit, which was initially set to expire at the end of November; and
  • abnormally low mortgage rates and home price declines which have increased housing affordability.

A growing number of first-time buyers have been using loans insured by the Federal Housing Administration (FHA), reaching 38.3% in October 2009 – up from 32.5% a year ago and only 2% in 2007.

It’s clear the government’s healing actions to stimulate the housing market have shouldered a brunt of the stabilizing workload. However, the question remains whether the California housing market will still be able to stand on its own two feet after the governmental crutch is removed.

first tuesday take: Those who believe the economy has naturally resumed it upward trajectory must give credit where credit is due: the federal government.

California is still very much on life support. Sometimes heavy medication of the mind-altering variety can fill a patient with false hope. But remember dear patient, it’s not your body’s regenerative mechanisms giving you strength – it’s the deluding effects of opium.  Just because California is no longer in critical condition, it is wrong to suppose we’ll stay healthy once all the external life support systems have been removed (and the mood-enhancing drugs have been withheld). Without government intervention, we’d very quickly revert straight back to our collective comatose state – at least until a true return to market fundamentals occurs.

Consider the following: the Federal Reserve (the Fed) has continued to keep the short-term interest rate artificially low, hovering just slightly above zero. The “real” inflation adjusted rate is below zero. While this has temporarily equipped buyers with attractive financing options, this golden ticket, printed by the Fed with the sole purpose of stimulating growth, won’t last forever.

Also consider the first-time home buyer credit. While it has sparked a greater volume of home sales in the short term, it also effectively ate into next year’s supply of buyers. Though we’re feasting today, we’re likely to go a bit hungry tomorrow.

All these governmental factors coalesce to form the misleading conclusion we see here: the worst is unequivocally behind us and we’re already ricocheting back up from the very bottom.  It would be foolish to accredit these positive indications to the market properly correcting itself when the recovery has been artificially induced.

Though the Fed’s actions to stabilize the financial industry saved the nation from economic calamity as was fully anticipated, the same cannot be said for the Fed’s handling of the real estate market, where its constant meddling is delaying legitimate recovery and postponing the necessary return to real estate market pricing fundamentals. Congress and the administration also have been meddling with a prompt recovery by stalling foreclosures and preventing properties from clearing through the real estate marketplace as they otherwise would.

The consumer must rise to the occasion by spending without inducement from the federal government.  That time is about to arrive and the confidence level is about to be tested. The government in the 1930s cut off the stimulus a year or two too early and that pitched the country into a decade long recession.  Confidence in the government and the economy has not sufficiently returned for the government to get out of the spending and encouragement business which businessmen are not yet fit to provide.

Re: “Southland home sales up again, drop in median price smallest in 2 years” from DQNews.com.