How has the two-week shutdown of the federal government affected home prices? The main sales-price indexes won't tell us until 2014: homes going under contract in October will close in November (or later), and November sales prices will get reported starting in January. But the Trulia Price Monitor shows how asking prices - a leading indicator of sales prices - are trending almost in real time, adjusting for both the mix of listed homes and for seasonality. This morning we analyzed asking prices between October 1 and October 15.
Finding the Effect of the Shutdown on Asking Home Prices
Nationally, asking home prices are up 1.0% between September and the first half of October, seasonally adjusted. This partial month-over-month increase is roughly in line with the month-over-month increases over the past few months. Before the shutdown started, several factors were already cooling down price gains, including expanding inventory, higher mortgage rates, and declining investor activity. Therefore, comparing how much prices have risen in October to date with previous months can't, by itself, show whether the shutdown has affected asking prices.
Instead, to tease out the effect of the shutdown on asking home prices, we looked at price trends across individual metros. We compared price changes in metros where the local economy is more dependent on the federal government - like Washington D.C., of course, but other metros around the country as well - with prices changes in metros where the local economy is less dependent on the federal government. (Our measure of dependence on the federal government - and therefore likely impact from the shutdown - is the share of local wages coming from the feds.)
Here's the punch line: metro-level asking home-price changes in the first half of October were uncorrelated with the local economic impact of the shutdown. Correlations and some simple regressions, controlling for past price changes, show no relationship between asking home price changes and how much of local wages come from the federal government. That means that the shutdown hasn't affected home prices yet: remember, if the shutdown were hurting home prices, we should see a bigger hit to asking prices in Washington D.C., for instance, than in New York and San Jose, where a very small share of total wages goes to federal employees.Aside From the Shutdown and Possible Default, Washington Still Worries Us The shutdown, of course, has had other effects on the housing market. Some mortgage processing has slowed or stopped. The delay in data releases, like the jobs report and tomorrow's home-starts report, creates more uncertainty about the pace of the housing recovery. Much more severe, defaulting on the debt would likely create havoc in the housing market as well as the overall economy. As of today, the worst-case scenario - a prolonged shutdown plus a debt default - is looking less likely, thankfully. But the housing recovery still depends on what the federal government will do in the coming months:
- Fed tapering: The Fed has slowed its plans to taper its bond-buying, but tapering should begin once the Fed decides the economic recovery is on solid ground and no longer threatened by the shutdown or debt ceiling debate. Tapering will probably increase mortgage rates; even changing expectations about tapering could cause rate swings.
- New budget negotiations: As of today, it looks like the agreement to end the shutdown and raise the debt ceiling will trigger a new round of negotiations over longer-term federal budget reforms. Recent debates over the federal budget have included various proposals for scaling back the mortgage-interest deduction, which would raise the cost of homeownership while reducing the budget deficit.
- Fannie and Freddie reform: Washington has begun what is likely to be a long debate over reforming Fannie Mae and Freddie Mac, which guarantee and securitize mortgages. The big question pretty much boils down to whether we should keep the 30-year fixed-rate mortgage relatively cheap and widely available, or whether we should minimize the cost of the next housing meltdown to the government - and therefore to taxpayers.