ST : Temporary tax credits lift US home prices

Apr 28, 2010

Temporary tax credits lift US home prices

MIAMI: United States home prices in February posted their first annual increase since the end of 2006, pumped up by temporary tax credits for home buyers. Another report showed that consumers in the US turned more optimistic this month as the growing economy raised hopes that jobs will become available.

However, although the Standard & Poor's/Case-Shiller home price index released yesterday eked out a 0.6 per cent gain, it was half the increase analysts had expected.

The data underscored the mixed and fragile nature of the housing recovery. Nationally, home prices are up more than 3 per cent from the bottom in May last year, but are still 30 per cent below the May 2006 peak.

And there is a 'risk that home prices could decline further before experiencing any sustained gains', cautioned Mr David Blitzer, chairman of the S&P index committee.

'It is too early to say that the housing market is recovering.'

Prices are getting a lift from temporary tax credits that expire at the end of this month. First-time buyers can claim up to US$8,000 (S$11,000) and home owners who buy and relocate can get up to US$6,500.

The Case-Shiller index measures home price increases and decreases relative to prices in January 2000. The base reading is 100; so a reading of 150 would mean that home prices have increased 50 per cent since the beginning of the index.

A rebound in prices is considered necessary to boost consumer optimism and help revive the economy. A home is the largest and most important financial asset for most Americans. So, as values climb, home owners feel wealthier and more comfortable spending.

For home owners who owe more on their mortgages than their properties are worth, rising prices rebuild equity.

Americans' confidence in the economy rose this month to the highest level since September 2008, just as the financial crisis escalated, private research group The Conference Board reported yesterday.

The Conference Board's confidence index rose to 57.9, exceeding all forecasts of economists surveyed by Bloomberg News and was the highest level since Lehman Brothers collapsed in September 2008.

The upbeat reading, combined with bullish earnings reports this week from companies ranging from Whirlpool Corp to UPS offered more hope that the economic recovery is gathering steam.

But unlike US businesses, which whittled down inventories during the recession, the housing market is suffering from a backlog of foreclosures. And as banks unload these properties en masse, it could overwhelm demand and push prices down again.

'The bottom line is that we're still fighting an uphill battle against a shadow inventory of foreclosures,' said Mr Daniel Alpert, managing director of Westwood Capital.

Still, it is 'highly unlikely' that price declines will approach the slide suffered in late 2008 and early 2009, wrote Mr Joshua Shapiro, chief US economist for MFR.

ASSOCIATED PRESS, BLOOMBERG