Hous­ing sales rise propped up by fed­eral aid

The Washington Times Weekly - - National - BY PA­TRICE HILL

The hous­ing mar­ket has shown some en­cour­ag­ing signs of strength in re­cent months, but an­a­lysts cau­tion that the mar­ket is mostly re­spond­ing to pow­er­ful gov­ern­ment stim­u­lus mea­sures and is not healthy enough to keep grow­ing on its own af­ter the with­drawal of fed­eral aid.

One ma­jor chal­lenge: The Fed­eral Re­serve has said it would soon stop pur­chas­ing home mortgages af­ter ac­cu­mu­lat­ing an un­prece­dented $1.25 tril­lion in mort­gage debt since Jan­uary in an at­tempt to keep 30-year mort­gage rates near or less than 5 per­cent.

Some an­a­lysts pre­dict the Fed will be forced to keep buy­ing mortgages to pre­vent a sud­den in­crease in in­ter­est rates and col­lapse in hous­ing. They note signs this fall that hous­ing was again tee­ter­ing af­ter en­joy­ing a good run of buy­ing ac­tiv­ity in re­sponse to a tem­po­rary hous­ing tax credit that prompted law­mak­ers to re­verse course and ex­tend and ex­pand the credit through April 30.

Dean Baker, co-di­rec­tor of the Cen­ter for Eco­nomic and Pol­icy Re­search, said the mar­ket has see­sawed in re­sponse to Congress’ and the Fed’s min­is­tra­tions, with home sales soar­ing to a twoyear high one month as buy­ers rushed to take ad­van­tage of the $8,000 tax credit and mort­gage applications plum­met­ing to a 12year low the next month as buy­ers pulled back in an­tic­i­pa­tion of the credit ex­pir­ing.

Congress’ de­ci­sion to ex­tend the credit should keep the mar­ket “rea­son­ably sta­ble” for an­other few months, he said, but hous­ing sales and prices will be un­der pres­sure again by the spring, when the Fed with­draws from the mort­gage mar­ket.

“The end of th­ese pur­chases will al­most cer­tainly raise in­ter­est rates” by as much as a full per­cent­age point, he said. “While this would still leave 30-year mort­gage rates at a rel­a­tively low 6 per­cent, this would sub­stan­tially dampen the hous­ing mar­ket.”

The mar­ket could get a dou­ble whammy with the ex­pi­ra­tion of the ex­panded tax credit on April 30 shortly af­ter the Fed pro­gram ends, he added.

More­over, a slowly mov­ing tidal wave of de­faults and fore­clo­sures on a record 15 per­cent of all home mortgages means that banks will keep tak­ing over mil­lions of houses and putting them on the mar­ket for sale, fur­ther de­press­ing con­di­tions.

“The un­der­ly­ing glut in hous­ing means that it is only a mat­ter of time be­fore house prices be­gin to fall again,” he said.

Frank Lee, a hous­ing an­a­lyst at Cred­itSights, said no one should be de­ceived by the pickup in home sales and prices this spring and sum­mer.

“The gov­ern­ment’s var­i­ous ef­forts to sup­port the hous­ing mar­ket ap­pear to be bear­ing fruit, but when this sup­port ends, home prices — along with other mea­sures of hous­ing ac­tiv­ity — may well start to weaken again,” he said.

“Gov­ern­ment ini­tia­tives have only likely re­solved hous­ing symp­toms tem­po­rar­ily, and not the un­der­ly­ing prob­lems — that is, high un­em­ploy­ment and the con­tin­ued rise in mort­gage delin­quen­cies and fore­clo­sures.”

Al­though the deep and pro­longed re­ces­sion in the hous­ing mar­ket be­gan with the col­lapse of the sub­prime mort­gage mar­ket

Frank Lee, a hous­ing an­a­lyst at Cred­itSights, said no one should be de­ceived by the pickup in home sales and prices this spring and sum­mer. “The gov­ern­ment’s var­i­ous ef­forts to sup­port the hous­ing mar­ket ap­pear to be bear­ing fruit, but when this sup­port ends, home prices — along with other mea­sures of hous­ing ac­tiv­ity — may well start to weaken again,” he said. “Gov­ern­ment ini­tia­tives have only likely re­solved hous­ing symp­toms tem­po­rar­ily, and not the un­der­ly­ing prob­lems — that is, high un­em­ploy­ment and the con­tin­ued rise in mort­gage delin­quen­cies and fore­clo­sures.”

in 2007, the big­gest prob­lem for hous­ing now is the loss of jobs, in­come and con­fi­dence among home­own­ers and po­ten­tial home­buy­ers as the re­ces­sion has deep­ened, he said.

“Em­ploy­ment is the pri­mary driver of hous­ing de­mand,” he said. “If one is not gain­fully em­ployed, it will be very dif­fi­cult to pur­chase a home that re­quires fi­nanc­ing.”

Job cuts have mul­ti­plied into the mil­lions in the past year, driv­ing un­em­ploy­ment over 10 per­cent and leav­ing nearly 16 mil­lion peo­ple looking for work. As peo­ple lose jobs and their un­em­ploy­ment ben­e­fits ex­pire, within months they are un­able to pay their mortgages and of­ten are forced to give up their homes to fore­clo­sure, height­en­ing the prob­lems in the hous­ing mar­ket.

The wors­en­ing em­ploy­ment and fore­clo­sure sit­u­a­tion has cre­ated an enor­mous “shadow in­ven­tory” of as many as 6 mil­lion homes that are not for sale right now but are likely to del­uge the mar­ket as banks put them up for sale in com­ing months, an­a­lysts es­ti­mate.

Mr. Lee said it would take a year and a half to sell all those homes, on top of al­ready plump in­ven­to­ries of more than 4 mil­lion ex­ist­ing homes for sale.

The huge over­hang of bad debts and fore­clo­sures will weigh on the hous­ing mar­ket for a long time, he said.

“It could take years for the hous­ing sec­tor — es­pe­cially the home-build­ing in­dus­try — to re­cover to nor­mal op­er­at­ing con­di­tions,” he said.

De­spite the great mag­ni­tude of the hous­ing and debt cri­sis, which plunged the United States and global econ­omy into the worst re­ces­sion since World War II, many peo­ple con­tinue to un­der­es­ti­mate the ex­tent of the dam­age or com­pre­hend how long it will take for the mar­kets to re­turn to any­thing like nor­mal, said Whit­ney Til­son, an ex­ec­u­tive at T2 Part­ners LLC and co-au­thor of a book on the mort­gage melt­down and hous­ing cri­sis.

“The col­lapse of the U.S. hous­ing mar­ket, the world’s largest debt mar­ket, is the defin­ing eco­nomic event of our life­times,” he said. The large drop in hous­ing prices af­ter the bub­ble burst ri­valed that of the Great De­pres­sion and has ma­jor con­se­quences that are still play­ing out and will de­press the mar­ket for some time, he said.

Mr. Til­son ex­pects an ad­di­tional 10 per­cent drop in home prices by next spring — which, com­ing on top of the more than 30 per­cent av­er­age de­cline al­ready seen across the coun­try, would bring prices in line with the his­tor­i­cal trend for home prices in the United States.

But be­cause so many home­own­ers greatly in­creased their mort­gage debt dur­ing the boom years, such a fur­ther de­cline in prices would be enough to wipe out all the re­main­ing eq­uity of most Amer­i­can home­own­ers who have out­stand­ing mortgages, he said.

That would leave most home­own­ers “un­der wa­ter.” Peo­ple who are “un­der wa­ter” are un­able to sell their homes or re­fi­nance them without help from the gov­ern­ment or their lenders, and as a re­sult are far more likely to go into de­fault or walk away from their homes, an­a­lysts say. Thus, de­ci­sions made by this vast ma­jor­ity of home­own­ers have the po­ten­tial to string out the hous­ing cri­sis for some time to come.

That is why “re­cent signs of sta­bi­liza­tion are likely the mother of all head fakes,” Mr. Til­son said, and are largely be­cause of the tem­po­rary sup­port the mar­ket is re­ceiv­ing from Congress and the Fed. He es­ti­mates that the na­tion is only about half­way though pro­cess­ing the tidal wave of de­faults and fore­clo­sures spawned by un­em­ploy­ment and the hous­ing cri­sis.

That means the dire con­di­tions that led to large-scale gov­ern­ment in­ter­ven­tion will con­tinue for some time, he said.

“The key ques­tion is whether hous­ing prices will go crash­ing through the trend line” and fall even more than 10 per­cent fur­ther, he said. “This is a real pos­si­bil­ity, though con­tin­ued mas­sive gov­ern­ment sub­si­dies could pre­vent it.”

AS­SO­CI­ATED PRESS

A sign for a newly con­structed home ad­ver­tises a fi­nanc­ing rate in Cha­grin Falls, Ohio. The Fed­eral Re­serve has been at­tempt­ing to keep 30-year mort­gage rates at less than 5 per­cent to en­cour­age home sales and help the bat­tered hous­ing mar­ket.

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