U.S. Government Policy Is Distorting the Housing Market

By: Mike_Larson

Every few months for the past couple of years, I’ve made it a point to update you on the state of the housing market. I feel it’s essential to do so because …

• You may be buying, selling, or holding a primary residence or vacation home.

• You probably have a mortgage, and maybe a home equity loan.

• And you’re probably concerned about the broader economy, which the housing and mortgage markets significantly impact.

So where do we stand now?

Well, the stabilization and very mild recovery I first told you was coming back in the spring, continues apace. Sales have generally been picking up. The supply of homes for sale has generally been falling. And prices, while still weak and falling, are not falling as quickly.

The real question is: What happens when the mammoth support that the government is throwing at the market ends?

Used Home Market Finding Its Footing

In September, existing homes sales hit a level not seen in over two years.

I’ll start with the existing home figures, since that’s the most important part of the market. Most of us own “used” homes and sales of such homes account for around 75 percent to 85 percent of overall transactions in any given month. The latest:

* Sales surged 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September from 5.09 million in August. That was twice the gain that was expected, and it left sales running at the highest level since July 2007.

* Single-family sales gained 9.4 percent, while condo and cooperative sales rose 9.7 percent. By region, sales climbed across the board, with the Northeast bringing up the rear at +4.4 percent and the West leading at +13 percent.

* Better yet, the raw number of homes for sale dropped 7.5 percent to 3.63 million units from 3.92 million in August. Supply was down 15 percent from a year earlier. That helped push the “month’s supply at current sales pace” indicator of inventory down to 7.8 from 9.3. That’s still higher than the 5-6 month range that’s considered “normal.” But it’s a significant improvement from the double-digit readings we were seeing.

* Pricing is still weak, with the median price of an existing home down 8.5 percent year-over-year to $174,900. But as any good housing analyst will tell you: Pricing lags sales and supply.

Indeed, if you recall what I said in my May 8, Money and Markets column:  

“I still believe home prices have further downside. That’s because we remain oversupplied, with approximately 1 million excess housing units for sale in this country. More foreclosure inventory will likely hit the markets in the coming months, too. Reason: Many of the filing moratoriums put in place at the state and industry levels have expired.

“But the sharpest declines in residential real estate are, for now, mostly behind us. I expect to see sales volumes gradually stabilize on a nationwide basis over the coming year, with total inventory for sale (new plus used) gradually coming down. By mid-to-late 2010, we should see pricing stabilize and gradually turn higher, with the improvement coming in stages depending on location.”

Buying New? Not Lately …

So what about the new home market? It’s taking a bit of a breather. An index put out by the National Association of Home Builders dropped to 18 in October from 19 in September. Builders said present sales, expectations about future sales, and prospective buyer traffic have all declined.

The new home market has slowed down a bit.

Meanwhile, actual sales have missed expectations for two months in a row. They dropped 3.6 percent in September to a seasonally adjusted annual rate of 402,000. Economists were expecting an increase to 440,000 units. Pricing remains weak, with the median price of a new home off more than 9 percent from a year ago to $204,800.

But here’s the thing: The supply picture in the new housing market has dramatically improved!

At the peak of the bubble, builders had 572,000 homes up for sale. That was the highest in U.S. history.

The dramatic cutback in production, combined with a general uptick in sales, has driven that number all the way down to 251,000. We haven’t had this few homes on the market since November 1982, almost 27 years ago.

Surprise, Surprise: Government Policy Is Distorting the Market …

Why are we seeing a divergence between the new and existing markets? Like it is in so many other parts of the economy, government policy is distorting things.

You see, the $8,000 first-time home buyer tax credit is set to expire on November 30. It applies to all transactions CLOSED by that date. The typical closing of an existing home takes about 30-60 days. So contracts signed as late as, say, July, August and even early September, are probably okay.

But when you sign a contract to buy a NEW home, unless it’s a “spec” property, you’re buying a plot of land. This means you’re looking at several months to build the house and close. So we got the tax-credit-fueled surge in the new home market EARLIER than the existing home market (June sales rose 7.6 percent, while May sales climbed 7.5 percent).

Since then, some buyers have gotten more reluctant to jump in because they fear they won’t be able to close in time to get their government handout … er … credit.

An extension in the tax credit should keep the housing recovery on track.

But — and this is important — Congress is now talking about extending the credit into 2010. The latest scuttlebutt is that the credit would now apply to all contracts signed through April 30 of next year, with an additional 60 days granted to close the transaction.

Not only that, but it may be expanded so that richer buyers could qualify! If that happens, couples making up to $225,000 would qualify, compared with $150,000 now. Plus it would no longer apply to only first-time buyers. If you’ve lived in your current home for at least five years, you would qualify for a credit of up to $6,500.

Bottom line is that the government’s massive housing and mortgage market support measures show no sign of letting up. In fact,

• The Federal Reserve is still buying $1.25 trillion of mortgage securities to keep rates low.
• The FHA is now backing the same kinds of high-risk loans that blew up private, high-risk lenders, allowing it to capture the largest share of the mortgage market in years.
• The “temporary” increases in the size of mortgages that FHA, Fannie Mae, and Freddie Mac can insure have essentially become permanent.
• And now, just as I forecast, the tax credit/handout is almost sure to be extended well into the future.

You don’t have to like it. Frankly, I don’t. But you do have to appreciate the reality of the situation and understand that it likely will keep the housing recovery on track.

It won’t be a linear process, though. Instead, I foresee more of a “three steps forward, two steps back” scenario.

Until next time,

Mike

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