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Housing Recovery May Stall As Federal Programs End

Cited: Time

April will see the expiration of two major federal programs, first-time home buyer tax credit initiative and the Federal Reserve $1.25 trillion mortgage-securities-purchase program.  It is unlikely that it will hinder the recovery currently in a battered housing market, that he could stall it according to experts.

To prevent a worsening of the housing situation, the White House is expected to announce today a new set of programs to shore up the market, including one that will cut the amount owed on troubled mortgages. There is also expected to be an upward bump in the cash incentives to lenders who reduce mortgage principals as part of loan modification, as well as a requirement that lenders trim monthly mortgage payments for the newly unemployed for a period of several months.

While the new programs should assist the most troubled end of the real estate market, they will not come close to replacing the huge intervention by the Federal Reserve in the mortgage-securities market, which helped keep mortgage rates enticingly low.

Still, many analysts believe the sector has stabilized enough to continue rebounding on its own, albeit at a painfully slow pace. “It’s not going to look like a V-shaped recovery in the housing market. It’s going to be one flat, long hockey stick, with anemic growth,” says Mark Fleming, chief economist at First American CoreLogic.

The other expiring program — the federal home-buyer tax-credit program, which offered an $8,000 credit to first-time home buyers — was so successful at luring home shoppers into the decimated market last year that the government extended it into 2010 and expanded it to include a $6,500 credit for non-first-time buyers. About 2 million families used the credit in 2009, and an additional 2.2 million to 2.4 million will take advantage of it this year, according to Yun. Approximately 800,000 of the transactions have involved home purchases that would not have been made without the credit, Yun estimates.

Analysts expect a surge in home-buying activity in the coming weeks as Americans rush to take advantage of the tax-credit program before its April 30 contract deadline. (Under the program, a contract must be signed by April 30 and the home closed by June 30.) Expect lobbying efforts calling for the credit to be extended a second time to escalate as the expiration date draws closer — similar to what happened in the weeks leading up to the first expiration date. But not all experts are on board. Jay Brinkmann, chief economist with the Mortgage Bankers Association, says he would not like to see the program extended a second time. “They work best if they’re somewhat rare and short-lived,” he says of such programs.

Of greater concern to many analysts is the pending expiration of the Federal Reserve program, which involved purchasing up to $1.25 trillion in mortgage securities backed by Fannie Mae and Freddie Mac. It could open the door to higher interest rates, although the Fed last week hinted that it would keep its benchmark rate near zero for the foreseeable future — a comment likely aimed at preventing panic.

“Right now, the one thing that really stands out to the advantage of the industry is affordability, and if interest rates were to move up sharply from here, that would meaningfully cut into affordability,” says Bob Curran, a managing director at Fitch Ratings.

Together, the federal programs baited buyers into the market at a time when unemployment exceeded 10% and the credit markets had seized up. Indeed, sales of existing homes have climbed year over year for eight consecutive months, reversing 43 consecutive months of decline. Curran expects housing starts to rise to 620,000 in 2010, from 540,000 in 2009. However, he notes that the 2010 projection is still far short of the 2005 peak of 2.1 million.

Certain markets are faring better than others. Boston, parts of southern California, Houston and Dallas have seen sales and prices start to pick up. Even though California was the epicenter of the boom and bust, prices have bottomed in many of its markets, especially for entry-level buyers. “Whenever a foreclosed property comes onto the market [in California], usually there are 10 people ready to jump on it,” says Yun. The weakest markets include Florida, Las Vegas and Phoenix, which saw the largest pricing gains in the bubble years, as well as Michigan and Ohio, where job losses have been big.

Stephen Kim, a senior real estate analyst at Alpine Woods Capital Investors LLC, which holds shares in homebuilding companies, says he thinks there will be “only modest” declines in the months following the programs’ expiration unless the overall economy, or employment, also tanks.

Other factors — rising unemployment, rate resets on certain adjustable-rate mortgages, shadow inventory and escalating foreclosures — could derail the housing recovery, especially in the absence of the federal programs.

Then there’s the elephant in the room: jobs. The U.S.’s unemployment rate, which stood at 9.7% in February, is expected to hit at least 10.3% before peaking later this year, according to Gus Faucher, director of macroeconomics at Moody’s Economy.com. Says Brinkmann: “The fundamental driver in demand for housing still comes down to jobs.”

At the same time, the industry is bracing for an avalanche of specialized adjustable-rate mortgages, known as option ARMs, as well as certain alt-A mortgages, to reset over the next 12 to 15 months. At least $60 billion in option ARMs will reset in 2010, and an additional $64 billion will do so in 2011, according to First American CoreLogic. Experts say this will likely trigger another round of mortgage defaults and foreclosures in the second half of 2010 and cause home prices to fall another 5% to 10% this year before the market bounces back.

It might take even longer for true strength to be evident in the housing market. “Recent estimates suggest that it would take about 33 months to clear all troubled mortgages at the current pace of liquidations,” wrote Merrill Lynch analyst Michael Hanson in a recent note. Alex Barron, founder and senior research analyst at Housing Research Center LLC, has similar worries: “We need to be concerned about the homes that are significantly underwater but haven’t yet defaulted,” he says. “It may take another two, three or four years before we’re well on our way towards a real recovery.”

There are already signs of how fragile the rebound truly is. The latest month-over-month data show sales have slowed in recent months despite low mortgage rates and the home-buyer tax-credit program. New and existing home sales fell 2.2% and 0.6% respectively from January to February, and unsold inventory rose 9.5% during the same period. Some of February’s sluggishness could be explained by cold, snowy weather that blasted the Eastern seaboard, but the precise impact of this is hard to know.

While many analysts believe the market has stabilized, they emphasize that housing has a deep hole to climb out of. Since the housing peak in July 2006, home prices have plunged 30% on average, with certain bubble markets such as Phoenix, Las Vegas and parts of Florida seeing prices plummet more than 60%. Losses from the housing meltdown totaled $7 trillion at the end of 2009, according to Yun.

“Our best guess is that the market continues to move sideways in 2010 and we start to see recovery in sales and prices in more markets across the U.S. in 2011,” says Heather Fernandez, vice president of Trulia, a real estate research firm. “The housing market overall is starting to stabilize and move a bit sideways but certainly is not on the upswing.”

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My Take: I, for one, hope that they do extend both programs.  It is not like people are trying to purchase villas in Spain, they are trying to give a home to their families.  Both of these programs are allowing people with lower incomes to purchase their first home.  Of course, if they had the money they would probably purchase Marbella real estate because of the beautiful views they could get.

However, it is more likely that they will purchase Palisades real estate because they either live in the area or they are moving to the area.  The point is, many people in need those programs be able forward a new home even if it is used or previously owned.  There are many Upper Nyack NY homes there for sale because the original owners could not afford the mortgage.  That means there are people who want the homes and with the programs can afford them.

Even people in the Midwest are having troubles with their mortgages.  In fact, most of the country is having trouble with mortgages.  People in Indiana are going for Indianapolis IN refinancing just for a chance to keep their homes.  People in Kentucky are even trying to get their Louisville KY mortgage refinance to keep their home.  And now the government wants to cancel the two programs that are helping people across the country, that seems a little ridiculous to me.

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