Home truths for complacent economists

Tax credits disguised the fundamental weakness of the US housing market. The reality reveals bleak prospects for growth

Dean Baker
guardian.co.uk, Tuesday 31 August 2010 13.00 BST

The howls of surprised economists were everywhere last week as the government reported on Tuesday that July had sharpest single-month plunge in existing home sales on record. The next day the commerce department reported that new home sales hit a post-war low in July.

All the economists who had told us that the housing market had stabilised and that prices would soon rebound looked really foolish, yet again. To understand how lost these professional error-makers really are, it is only necessary to know that the Mortgage Bankers Association (MBA) puts out data on mortgage applications every week. The MBA index plummeted beginning in May, immediately after the last day (30 April) for signing a house sale contract that qualified for the homebuyers' tax credit.