Why did real estate rebound in 2012?
Why didn’t real estate rebound in 2011 or 2010 instead of 2012?
The economy wasn’t doing a ton better this year compared to last year so that wasn’t it. The interest rates were great for sure this year but they were also great in 2011.
The supply was tight in Phoenix and that was certainly a big factor in the large median price increase we saw here but even in markets like Florida where supply wasn’t so tight and they have an enormous shadow inventory, demand increased big time.
What happened to increase demand and why didn’t it happen earlier?
Fear of falling prices
My theory is that what demand needed to rebound was only one thing, some time without falling prices. Nothing would calm consumer fears about future falling prices better than a period with no falling prices. Only when those fears were sufficiently reduced would consumers dip their toes back into the real estate waters again in big numbers.
People just don’t like to buy stuff when its price is falling.
It doesn’t matter if the price is amazing and the affordability is off the charts, people are reluctant to buy something when they fear its price will fall.
So what’s the cure to low demand caused by falling prices? You have to have a period of no falling prices to let fears fade and demand to rebuild. This isn’t rocket science.
How the $8,000 first-time home buyer tax credit killed the real estate recovery
I think the federal $8,000 first-time home buyer tax credit program of 2009 and 2010 – that was championed by NAR (National Association of Realtors) – delayed the real estate recovery by more than a year.
In the spring of 2009, it looked like metro Phoenix home prices were bottoming out because home sales were taking off at those prices.
Then the tax credit program kicked in and by the autumn the program had raised the median home price significantly in metro Phoenix and nationally.
But apparently no one thought about what would happen when the program ended and when it did indeed end in June 2010 home prices tanked again in metro Phoenix and eventually fell below the spring 2009 median price.
In addition, remember “loss aversion” from behavioral economics, “Some studies suggest that losses are twice as powerful, psychologically, as gains.” That means a program that increases but then decreases prices like the tax credit program is not neutral on demand, it leads to a net reduction in demand in the end.
Home buyers scared off again
The Phoenix median home price fell fast in the second half of 2010 after the program ended. It was deja vu 2008 all over again.
Consumers were scared off again by the falling prices caused by the inevitable end of the government program.
Instead of having the no-falling-prices clock start in the spring of 2009, the $8,000 first-time home buyer programs delayed the start more than a year, until the winter of 2011.
If you wanted to design a federal program to intentionally delay the housing recovery for as long as possible, I don’t know if you could have designed a better program than the $8,000 first-time home buyer tax credit.
It wasn’t until the winter of 2012, a year after the no-falling-prices clock finally started, that housing demand really took off.
NAR is too clever by half
The NAR initiated tax credit program ended up extending the period of home buyer fears of falling prices when what demand really needed was a period of stable prices to let home buyer fears fade.
NAR delayed the real estate recovery by more than a year with their $8,000 tax credit program.
No bad deed goes unrewarded
NAR, on the other hand, thought the program was such a smashing success that they decided to increase their member fees so they could pump more money into lobbying for more programs like the $8,000 first-time home buyer tax credit.
Apparently, NAR judges it’s lobbying success by how much money they’re able to get the federal government to spend on NAR’s pet projects.
Until NAR realizes that the $8,000 first-time home buyer tax credit program was a financial disaster for NAR members and the U.S. economy as a whole, NAR will continue making the same devastating mistakes.