America is in serious trouble and it will take many efforts to bring the country back from a recession/depression.  While most of the measures that the U.S. Government is taking are well beyond my understanding, their efforts on housing are something I believe I have a firm understanding and it is with these efforts which I have concerns.

Many have argued that the reason the economy stopped growing was that housing started falling and that the way to grow the economy again is to stop the fall in housing.  My argument is that housing was just one of the things that bubbled out of control (as did personal debt, corporate debt, derivatives markets, etc) and that until these are all back in line with historical levels we can’t put a firm footing to build upon.

While most housing data uses the Median Sales Price of all home sales to determine affordability, I believe that this metric is not a good representation of current housing prices.  If we look at the Twin Cities, the 2008 Median Sales Price was $195,000… a healthy 13.3% decline from 2007′s $225,000.  If we separate the sales data into “lender mediated sales” and “traditional sales” we find that the Traditional Seller Median Sales Price has only fallen 4.1% to $223,000 in 2008 from $232,500 in 2007.

The lender mediated sales we have today, the foreclosures and short sales, are a relative short-term phenomenon on the timeline of home ownership.  Even if these sales persist for a few more years, when these sales are gone the only homes and prices we’ll have are those of the Traditional Sellers.  With interest rates near all-time record lows, the current prices are still affordable but when interest rates climb to 6.5% – 7%, which are still historically good rates, home affordability will sink 20%+ and we’ll again be faced with housing prices above sustainable levels.

The problem with the $15,000 tax credit currently being proposed is that it will artificially put a near-term bottom in house prices but leave us with prices still too high when interest rates move up.  Further, while this might provide a large incentive to purchase homes, if buyers are unsure about their job security, will they feel comfortable with taking on more debt than they likely ever have before?  To me, the best way to spend this money is to get the job market growing again and let house prices settle at whatever level the market forces dictate versus at an artificially higher level.  While this may seem more painful in the near term, I believe it will leave us better off in the long run and will help prevent a potential double bottom in real estate prices.

Added 2/9/09 @ 6:30pm-I forgot to note that this credit is proposed to last 12 months so while we all agree we need economic stimulus NOW what we get instead is Congress offering housing stimulus with no urgency to buy now, but rather sometime in the next 12 months.  I hope we’re better off in 12 months than we are today and while I don’t think this is the best course of action to take, I think that if we do use it then we’d be far better off to make it only good till July 4th or September 1st or something much more limited in timeframe.