The Real Winner of a Housing Recovery: State Governments — PragCap

The Real Winner of a Housing Recovery: State Governments

  • 09/07/2012

By Rom Badilla, CFA, Bondsquawk

Recent data releases suggest that housing may have finally bottomed and a turnaround is near. Historical low interest rates coupled with a dwindling of the current stock of housing in inventory has contributed to the reversal. This is evident in the latest release of the S&P/Case-Shiller Home Price Index for June which increased 1.22% on national level surpassing market expectations.

Furthermore, JP Morgan’s Head of US Municipal Strategy, Chris Mauro, wrote in his latest U.S. Municipal Notes, that data provided by the Federal Housing Finance Agency reinforces the belief of a recovery. In particular, quarterly housing price index (HPI) numbers appreciated in many states across the country:

In 2Q2012 the HPIs increased in 46 states on a quarter/quarter basis and in 39 states year/year. We find it encouraging that even some of the hardest hit “housing bust” states are beginning to see home prices move off the bottom. For example, Arizona registered the largest percentage price increase among all the states. While still down nearly 50% from its 2006 peak, Arizona’s HPI is up over 13% year/year.

In addition to easing the pain of many homeowners who are underwater on their mortgages, the reversal and firming of the housing market is a “bright spot” for the local government sector.

These credits have seen their two most significant sources of revenue, property taxes and state aid, come under significant pressure since the beginning of the 2008-2009 recession. According to the Rockefeller Institute of Government, local property taxes have now declined for six consecutive quarters in real terms. While we expect that state aid will continue to be significantly depressed for some time, a bottoming in property values should help to eventually stop the hemorrhaging in property tax revenues. This will indeed be a positive development for local governments, a sector of the market that has seen little in the way of good news in recent years.

Sustained gains in housing should help property tax revenues reverse course for local governments. As we talked about here several weeks ago, a reluctance to spend due to tighter fiscal budgets is having an effect on the municipal market. In particular, with no new projects, there is little need to access the capital markets in the form of new issue bonds. As a result, supply for municipal bonds has been tapering off. Given the early signs of a housing turnaround which could domino into a recapturing some of the lost revenue stemming from the recession, the municipal market could see a reemergence of supply at some point in the future.

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