In this Issue: Home Prices Rise for 3rd Straight Month  Homebuyer Tax Credit: Should it Expire? Mortgages: Finding the Best Deal   (Please leave us a comment at the bottom of the newsletter.)

Home Prices Rise for 3rd Straight Month

The market value of U.S. homes in 20 major cities rose by 1.6% in July compared with June, the third monthly increase in a row, according to the Case-Shiller home price index recently released by Standard & Poor’s.

In July, prices rose in 18 of 20 cities. Only Seattle and Las Vegas recorded lower prices in July than in June. In the past year, prices are down 13.3% in the 20 cities. Prices are down 32.6% from the peak, and are now at levels seen in late 2003. Prices in all 20 cities were lower in July 2009 than in July 2008. The figures are not seasonally adjusted. Prices typically rise in the summer months when demand is stronger.

The figures indicate a “stabilization in national real estate values,” according to David Blitzer of S&P, who cautioned that the expiration of the first-time home buyer tax credit and increased foreclosures could put more downward pressure on prices.

Falling home values had been a factor contributing to the global economy plunging into chaos because financial institutions made too many bad bets that U.S. home prices would never fall. Homeowners have lost trillions of dollars of wealth. Millions of homeowners have found themselves owing more on their house than it is worth. They cannot sell for what they owe, and they cannot refinance their home loans. Nor can they borrow against their home to finance their consumption. Rising unemployment is now driving foreclosures. Another wave of foreclosures from interest-payment only mortgages is anticipated.

The Case-Shiller 20-city index tracks repeat sales on the same properties over time, but it closely tracks only 20 cities, not the whole country. Following are, in descending order, the price changes in each of the 20 cities over the past year, based on the Case-Shiller data for July: Las Vegas, down 31.4%; Phoenix, down 28.5%; Detroit, down 24.6%; Miami, down 21.2%; Tampa, down 18.4%; San Francisco, down 17.9%; Minneapolis, down 17.3%; Seattle, down 15.3% Los Angeles, down 14.9%; Chicago, down 14.2%; Portland, down 13.9%; San Diego, down 12.3%; Atlanta, down 11.9%; New York, down 10.3%; Washington, down 9.8%; Charlotte, down 9%; Boston, down 4.9%; Denver, down 2.9%; Dallas, down 1.6%; and Cleveland, down 1.3%.

Meanwhile, the number of homes lost to foreclosures rose about 17 percent in the second quarter of this year despite the launch of an extensive government program aimed at helping borrowers save their home, according to data released by the the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which regulates banks.

The mortgage data "continued to reflect negative trends influenced by weakness in economic conditions including high unemployment and declining home prices in weak housing markets.
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Homebuyer Tax Credit: Should it Expire?

(Note: This article from Time)

The $8,000 first-time-home-buyer tax credit that's been helping juice the housing market is set to expire on Nov. 30. A lot of people don't want to see that happen. Since some of those people are in Congress, there's a decent chance the credit will be extended into 2010. Among the bills floating about are ones that would grow the amount to $15,000 and make all home buyers — not just those who haven't owned before — eligible. One policy-analysis shop puts the odds of some extension at 2 to 1, despite a cost that could run as high as $50 billion to $100 billion.

This makes little sense. Since the credit first passed last year, the logic of our financial rescue has evolved. The panic phase — the time when so many felt government had to act boldly and at any cost — has passed. Slowly, the free market is easing back in.

In most realms, in fact, the return to normality is under way. Banks are paying back TARP funds. Cash for Clunkers has faded into the sunset. The chairman of the Federal Reserve Board has declared the recession over, and home prices are inching upward.

So why does the home-buyer tax credit persist? First, because of fear. Falling house prices, necessary though they were, triggered a lot of the mess we're in, and the thought of quashing a nascent recovery naturally leads to thoughts of another round of repercussions. Home sales have been growing for months, but a one-time pullback — like the one we saw in August — can still send chills down everyone's spines.

Aside from the desire everyone has not to snuff out any rally fires, this tax break probably isn't good policy, especially now that we seem to have left the darkest part of the housing-market woods. Here are the numbers:

• The IRS says 1.4 million first-time buyers have benefited from the credit so far; The National Association of Realtors thinks that figure will hit 1.8 million before the end of November.
• Meanwhile, a number of groups have estimated how many of those people wouldn't have bought houses had it not been for the tax break — about 350,000 or 400,000. In other words, some 80% of buyers would have bought anyway.
• In many markets, prices have fallen so far that houses are affordable in a way they haven't been in years — that's a reason to buy even without a gift from the government. We're giving up tax revenue on $11 billion that we don't need to.

On top of that, the way the tax credit is being implemented at times echoes certain practices that may have helped get us into the housing mess in the first place. For example, some state housing agencies are allowed to provide second mortgages to buyers who don't have enough money for a down payment so that they might "monetize" the tax credit and get the cash up front. Down-payment assistance is considered by many to have contributed to the crisis because it helped people buy homes they couldn't really afford. Anyone who doesn't understand that it's a bad idea to push people into buying houses when they're not ready to hasn't been paying attention for the past two years.

Worse yet, by extending the home-buyer tax credit, especially to existing homeowners, we run the risk of creating a situation where it never goes away. If a tax credit — or any other economic benefit — sticks around long enough, people start feeling entitled to it, even if it was originally supposed to be temporary. In academic literature this is called the endowment effect. Taking away such a program once it's ingrained can be a monumental political challenge. It's not just that expanding the home-buyer tax credit would cost $50 billion to $100 billion this year. It's that it could easily wind up costing that every year.

The question, then, is, Do we want to create a broad new housing-related entitlement?

To figure out the answer, we might look to an existing one: the mortgage-interest tax deduction. Each year we give up some $80 billion in tax revenues so that homeowners don't have to pay tax on the income spent on mortgage interest. The thing is, about half of homeowners don't claim the deduction; they don't see the benefit, nor do the one-third of people in the U.S. who rent the homes they live in.

The people who do see a meaningful benefit are, by and large, already rich. Economists James Poterba and Todd Sinai found that the tax savings from the mortgage-interest deduction for households earning more than $250,000 is 10 times the tax savings for households earning $40,000 to $75,000. According to Congress's Joint Committee on Taxation, a little more than half of the savings is seen by just 12% of taxpayers — those with incomes over $100,000.

The other interesting bit about the mortgage-interest deduction is that policymakers never intended it to help promote homeownership — something that many people assume to be the case and use to help frame their thinking about the appropriateness of using the tax code to boost home-buying. Rather, the deduction is an artifact of the 1894 federal income-tax code, under which all interest was deductible, since pretty much all interest was a business expense. There weren't really loans to buy houses back then. In other words, a massive and costly cornerstone of American housing policy isn't even something we chose.

The good news with the home-buyer tax credit is that we do, in fact, have a choice.

What do you think? Leave us a comment at the end of this newsletter.

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Mortgages: Finding the Best Deal

With interest rates continuing to hover near all time lows, and time now just about gone on the First Time Home Buyer Tax Credit, (pending  on whether the government decides to extend the credit) many people are asking, "How do I find the best deal on a mortgage, how do I compare what lenders are offering me?"

In part 2 of this series (part 1 in your September  newsletter), Money Talks editor, Stacy Johnson, explains the importance of comparing what one lender is offering against the others:

In our November issue of this newsletter, Stacy will cover, "How to call each lender to make sure you're getting the best deal."