Baby Steps

The Illinois Association of Realtors released their existing home sales and median price numbers this morning and to quote former Arizona Cardinal Coach Dennis Green "they are what we thought they were." We did expect sales to increase moderately this month, and they did. We did not expect them to exceed last year's numbers, and they didn't. Most importantly, sales continued in the proper direction. Sales historically increase incrementally through July and then begin to tail off a bit. This is because the months of March, April and May are typically are the busiest for realtors. The units that they sell don't actually close until May, June and July, which are the numbers reported by the Illinois Realtors Association. So, given the seasonality of the local housing market and the increased level of activity reported by realtors during the past couple of months, we anticipate that sales will continue to increase in June and July, before tailing off a little in August. Why is this significant? Because this is the normal sales pattern in Chicago (and most other markets across the country).

At this stage of our housing recovery, a little normalcy is a good thing even if the volume isn't quite what we want to see. Next year during the sales season, we will see the same pattern, with a little more volume. And the same will hold true for 2011. Before we know it, the housing market will begin to feel a lot more "normal."

Do State Sponsored Tax Credits Work?

The State of California is in a budget crisis of epic proportions.  The estimated deficit in California is in the range of $41 billion, which makes the Illinois projected deficit look like small potatoes.  However, California did have the foresight to pass legislation that enables the purchasers of new homes to apply for a $10,000 tax credit (up to 5% of the total purchase price).  

So here we are 3.5 months into the program and over 8,000 homebuyers have already applied for the tax credit. The remaining funds could be spoken for in the next two weeks, and this has builders concerned. They'd like to see this momentum continue. Several bills are currently floating around Sacramento that would increase the $100,000,000 funding cap, remove the cap altogether or some combination of the two.

The results of the program are pretty clear to see.  New home sales increased by nearly 50 percent from March to April, and will likely increase again in May.  Large builders once again have pre-2005 backlogs (KB Home has over 1,000 units in backlog) and builders are again hiring construction workers.  The state estimates that for every new home started, three new jobs are created.  I believe this equates to approximately 30,000 new jobs directly attributable to the tax credit.  These are jobs directly connected to the construction of a new home and don't include peripheral jobs such as appliance manufacturers, retail sales at home improvement and decorating stores, furniture manufacturers, etc.  Clearly, new home construction is good for the local and national economies.

Of course, the argument against such a plan is that we are artificially propping up the new construction industry and we already have to much housing stock.  While these are both true statements (although arguments can be made that we don't have enough new housing stock), maybe propping up the housing industry will buy us a little time while the rest of the economy gets its act together.

To learn more about the California new home tax credit, please follow this link to a recent article in Big Builder Magazine.

V Shaped Economic Recovery?

The economists at First Trust Advisors (based in Wheaton, IL) have been trying to convince whomever will listen that the pending economic recovery will be "V" shaped rather than the conventional wisdom of an "L" shaped recovery.  While some of the statistics that economist Brian Wesbury identifies are a little obscure, that fact remains that most of the statistics indicate that we reached the bottom of this economic crisis somewhere around January or February of 2009.

We still contend that the housing market will not begin a sustainable recovery until we see job losses turn into consistent job gains.  However, according to Mr. Wesbury, the end of job losses may be on the horizon and job gains could be right around the corner.  

Regardless of whether you believe in the "L" or "V" shaped recoveries, it might make us all feel a little better if we read Brian Wesbury's articles every now and then.  His most recent articles can be found here.