Housing Market Revocery - Still Rocky

Housing market in rocky recovery

The housing market is in the midst of a rocky recovery, but it’s too soon to declare the end of the worst real estate slide since the Great Depression.

Sales of existing homes picked up sharply last month and prices stabilized. But that’s because the market got a big boost from tax credits for first-time home buyers. It remains to be seen whether the momentum will carry over through next year after the program was extended through April.

One clue may lie in Wednesday’s report on new home sales for November, which took an unexpected drop. For technical reasons, the tax break didn’t give new sales the same boost as existing homes. That’s because new sales are recorded when contracts are signed, while existing sales are logged when the sale closes. To get the original $8,000 tax credit, buyers had to close before Nov. 30, so new homes purchased in November likely wouldn't have closed in time to qualify.

The housing outlook is further clouded by a big wave of foreclosures that’s expected to break in the next two years.

“We have a tsunami of foreclosures — 3.5 million people who are 60 days delinquent, seriously delinquent, and probably another 3 million after that who are going to reach that stage,” said Yale University economics professor John Geanakoplos. “All six million of those will probably be kicked out of their houses.”

The housing industry got some holiday cheer Tuesday as the latest monthly data showed the sales of existing homes in November posted the biggest gain in nearly three years. But when the impact of the Nov. 30 tax credit deadline wears off, the housing market could face something of a New Year’s hangover when the December figures are released.

“Existing-home sales are likely to plunge in December,” according to Patrick Newport, U.S. economist at IHS Global Insight.

Because it targeted first-time buyers, the impact of the tax credit was felt most heavily at the low end of the market. More than 70 percent of November sales involved houses priced under $250,000.

To keep the housing recovery going, Congress last month extended the tax credit and expanded it. Under the second round, buyers who have lived in their current homes for at least five years can claim a credit of up to $6,500 on a new home if they sign a purchase agreement by April 30.

The hope is that by next spring, the housing market and economy will begin showing sustainable growth without the help of the government. The risk is that the tax credit simply moves up future sales without creating new demand.

That risk was highlighted by a separate report Wednesday showing that sales of new single-family homes unexpectedly fell to their lowest level in seven months in November. (New home sales account for about 5 percent of the housing market.)

The Commerce Department said new home sales dropped 11.3 percent, the biggest decline since January, to a 355,000 unit annual rate. Still, there were some bright spots in the report. The median sale price for a new home rose 3.8 percent from October to $217,400, the highest level since May.

A sustained housing recovery will depend on several factors, including a recovery in the labor market. Most economists expect the unemployment rate, currently at 10 percent, to remain close to that level for through next year. Without a paycheck, those jobless workers can’t get a mortgage.

The housing market also faces a stiff headwind from the continuing high rate of foreclosures, which drives down prices and adds to the backlog of unsold homes as lenders put those properties back on the market. Foreclosure filings in the U.S. will hit another record this year, with an estimated 3.9 million notices sent to homeowners in default, according to RealtyTrac. A record 14 percent of homeowners with mortgages are either behind on payments or in foreclosure.

“It looks like builders are having a real problem trying to compete with the depressed prices in the existing home market,” said Joel Naroff, president of Naroff Economic Advisors.

Despite three government relief programs since the housing market collapsed in 2007, millions of families are expected to lose their homes over the next two years. Under the latest program launched in March, some 760,000 eligible borrowers have been offered modified loans, but only 31,000 of those trial plans had been made permanent as of last month, according to a report this week from bank regulators.

Part of the reason for the poor showing is that mortgage servicers don't have adequate staff and systems to process the increasing number of trial plans, the report said.

But lenders have also been slow to take more aggressive steps, such as cutting mortgage balances to reflect lost home values. Mortgages that were pooled and sold to investors have also created financial incentives for mortgage companies to drag out the process, according to Geanakoplos.

“They are leaving (owners) in their homes longer and longer because (mortgage servicers) realize they can continue to keep their fees coming, even as the people sit there,” he said.

Effective foreclosure relief is only one piece of the housing outlook puzzle. A sustained recovery will also depend on the cost and availability of credit.

Mortgage rates remain below 5 percent, though they’ve been inching up in recent weeks. Those low rates have been engineered largely by the Federal Reserve through its program to buy $1.25 trillion in mortgage-backed securities. About two-thirds of that has already been spent. In its latest regular policy statement, the Fed included a reminder that the program is set to end next spring. It’s not clear whether rates will begin rising after the Fed stops buying mortgage-packed paper.

Low mortgage rates have helped millions of homeowners reduce payments on their existing homes; roughly three out of four mortgage applications in the first two weeks of December were for refinancing, according to the Mortgage Bankers Association. That will help household budgets and shore up consumer spending, but it hasn’t spurred home buying.

Consumer spending rose for a second straight month in November as incomes recorded their biggest gain in six months, the Commerce Department reported Wednesday.

Falling real estate prices also have helped boost demand for homes by making homes more affordable. The median price of existing homes sold in November was $172,600, down 4.3 percent from a year earlier.

The combination of cheap mortgage money and lower prices has pushed the so-called “affordability” index close to its highest level in nearly two decades, according to the National Association of Home Builders.

As prices stabilize, lenders may become more confident about writing new mortgages, helping sustain demand after government incentives expire, said Richard DeKaser an economist at Woodley Park Research. “I think that we’ll have the baton passed from the public to the private sector as lenders start to loosen up the purse strings," he said.

Tight credit — a reaction to the wave of easy money that sank the housing market in the first place — also could weigh on a sustained housing rebound. To help ease credit, President Barack Obama met this week with community bankers to seek ways to get more loans flowing to small businesses and home buyers. Lenders have argued that credit has slowed because the weak economy has cut the demand.

They have money to lend. Most banks have been steadily rebuilding their capital reserves as they profit from a favorable interest rate environment. But those reserves could take another hit next year unless the job market bounces back.

“We could see a secondary tightening of credit as the losses from 10 percent unemployment and defaults come through,” said Diane Swonk, chief economist at Mesirow Financial. “That’s is what the Fed's concerned about — averting that secondary tightening of credit.”

By John W. Schoen
Senior producer
msnbc.com