Thursday, October 1, 2009

Duy: The government is doing everything it can to re-create a housing bubble

From the Oregonian:

Portland's housing market showed solid improvement in July as prices climbed for the second straight month, reversing what had been a 17-month run of record declines.

The closely watched Standard & Poor's Case-Shiller index published Tuesday showed Portland-area home prices were still down 20 percent from the 2007 peak. Small upticks this summer, even after accounting for seasonal swings, has economists wondering if housing is on the mend. Outside of Oregon, Case-Shiller's 20-city composite index also rose for the second straight month.

"No matter how you measure it, house prices looked to have bottomed, which is the much-needed ingredient required to bake this housing market recovery," wrote Jennifer Lee, economist at BMO Capital Markets.

Not every one is as rosy.

University of Oregon economist Tim Duy said the housing market is seeing a "speculative frenzy fueled by the government."

The market has been buoyed by a drop in supply thanks to homeowners reluctance to sell in a down market. There's been a bump in demand thanks to federal enticements. Those two factors helped stabilize prices and even prompted small growth, Duy points out.

But how sustainable is that growth?

"The government is doing everything it can to re-create a housing bubble," Duy said.

The federal government's aid includes low interest rates, an $8,000 first-time buyer tax credit and 3.5 percent down payment loans from the Federal Housing Administration. The tax credit is set to expire at the end of November and the Federal Housing Administration is having its own financial troubles.