Housing market outlook for 2011.

• Author: Kinghorn, Matt R.

The short-term direction of the housing market seems as murky today as it has at any point in recent years. Following the expiration of the federal homebuyer tax credit program in June, housing demand has been lackluster, even by today's standards. Additionally, mounting foreclosures and short sales threaten to erode home values further. Meanwhile, the stalled labor market serves as a backdrop to these housing woes. Daunting as these problems may be, the conditions are right for a recovery as prices have come down and interest rates are low. However, it may be some time before consumers are confident enough to jump back into the housing market in large numbers.

Housing Market Tries to Stand on Its Own

The dramatic decline in the U.S. housing market in recent years has been well documented. The sale of new homes dropped 71 percent from a peak of about 1.4 million units in 2005 to 374,000 units in 2009. Existing single-family home sales fell 27 percent over the same period and home values have declined in much of the country. In response to these conditions, the federal government initiated its tax credit program for homebuyers in hopes of boosting demand. It seems clear that this program, which ran from early 2009 through April 2010, did at least help to break the free fall in home sales and values. However, it is difficult to know if these tax credits simply hastened the purchase of homes by those who would have bought anyway or if they induced new buyers into the market.

Whichever the case may be, Figure 1 suggests that we are in the midst of a predictable post-homebuyer-tax-credit hangover. After declining at an average rate of 3.1 percent per month between July 2005 and April 2009, new home sales stabilized and grew at an average monthly rate of 1.1 percent through April 2010. Without the aid of federal stimulus, however, new home sales fell sharply in May 2010 and have remained low. In fact, the five months since the expiration of the tax credits are the five lowest monthly new homes sales figures on record dating back to 1963. Home values, as measured by the Case-Shiller Home Price Index, also steadied while the tax credits were active but ticked downward in July and August.

[FIGURE 1 OMITTED]

The situation has been similar in the market for existing homes. According to the National Association of Realtors, existing home sales increased nearly 5 percent between 2008 and 2009 and the rate of sales remained relatively strong through the...