Atlanta Real Estate Blog

Triple Whammy Coming for Housing in 2010 ?

Home Buyers and Home Sellers: I have a question for you …

What will happen to your desire to buy a home / sell a home IF:

1) Congress does not renew the ‘first time home buyer’ tax credit ?

2) Interest rates increase by … 1+% or more ?

3) Foreclosures INCREASE … and the number of REO (bank owned) homes causes the inventory of unsold homes to double?

4) FHA lending standards tighten ... requiring more downpayment, etc. ?)

P.S., You may already know that all 4 of those things are happening …. and happening now.

Here is an excerpt from an article from Bloomberg.com. Click the Bloomberg.com link to see the complete article.

The recovering housing market may be heading for a relapse as President Barack Obama and Federal Reserve Chairman Ben S. Bernanke consider ending support for the source of the global financial crisis.

The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.

Many people deny that the Fed would end this program …. but, they will have to. Why? Because if they continue the program it will become entitlement. The tax credit will go from being something that was meant to be a short term tool to a long term expectation. Remember cash-for-clunkers? That ended. What happened to car sales post cash-for-clunkers? Car sales went back to the PRE-cash-for-clunkers levels. Will the same things happen with home sales?

“Things could get ugly,” said Lawler, an independent consultant in Leesburg, Virginia, who spent 22 years at Fannie Mae, a Washington, D.C.-based government-controlled mortgage- finance company. “We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”

Major Test

This is the first major test of policy makers’ ability to coordinate exit strategies as they seek to wean the economy off government support, said Brian Bethune, chief financial economist of IHS Global Insight, a forecasting company in Lexington, Massachusetts.

They have already acted separately, with the administration ending its $3 billion “cash-for-clunkers” automobile trade-in program on Aug. 24 and the Fed starting to wind down its purchases of Treasury debt, which totaled $285.2 billion between March 25, when the initiative began, and Sept. 16.

The 55-year-old Bernanke and his colleagues, who meet tomorrow and Wednesday to map monetary strategy, discussed “tapering” off the Fed’s purchases of mortgage-backed securities and housing-agency debt at their last gathering in August, according to the minutes of that meeting.  No decision was made by the central bank’s policy-making Federal Open Market Committee.

Translated: Mortgage Interest rates WILL increase.

Mortgage-Backed Securities

Under the current program, the Fed is scheduled to buy up to $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of the year. So far, it has purchased $862 billion of the former and $125 billion of the latter.

A trio of Fed presidents — Jeffrey Lacker of Richmond, James Bullard of St. Louis and Dennis Lockhart of Atlanta — has publicly raised the possibility the central bank might not spend all the money authorized for the mortgage-backed securities. Lacker questioned whether the economy needs the additional stimulus in an Aug. 27 speech.

New York Fed President William Dudley, who is vice chairman of the FOMC, has sounded more cautious.

“The market expects us to complete these programs,” he said Aug 31.  “To contradict that market expectation is a pretty high hurdle.”

We expect to see rates increase to 5.5%-6% if the Fed pulls back. People are buying homes because owning is a better financial proposition versus renting.  If rates increase that rationalization will go away. With the probability of short term appreciation, it will be difficult to rationalize paying more for a home versus saving money and renting.

Abrupt Stop

An abrupt stop might push up mortgage rates by a half to one percentage point, said Hooper, a former Fed official.  Tapering off — by reducing weekly purchases and stretching them beyond the end of the year — would have a more muted effect, pushing rates up by at least a quarter percentage point, he said, adding that the Fed may announce just such a strategy after its meeting this week.

Mortgage rates for 30-year fixed home loans averaged 5.04 percent in the week ended Sept. 17, down from 5.07 percent the previous week, according to McLean, Virginia-based Freddie Mac, a government-controlled mortgage-finance company.

Borrowing costs for home buyers are relatively high based on the historical relationship with the Fed’s target rate for overnight loans between banks, currently at zero to 0.25 percent.

Crucial Extension

A number of Washington-based organizations — the National Association of Home Builders, the National Association of Realtors and the Mortgage Bankers Association — say an extension of the buyer’s tax credit is also crucial.

Lawrence Yun, chief economist of the realtors’ group, estimates that about 350,000 home sales through August were directly attributable to the tax credit of up to $8,000 for first-time buyers.  People buying their first homes accounted for 43 percent of sales since the credit became law, up from 32 percent in the six weeks prior to its passage, according to Washington-based Campbell Communications Inc.

Yes, the credit did motivate buyers to buy. No doubt.

Treasury Secretary Timothy Geithner, 48, called signs of stabilization in the U.S. housing market “very encouraging” and told reporters on Sept. 17 that the Obama administration will take a “careful look” at extending the credit. Does that sound like a confident endorsement ?

‘Slim’ Chances?

Congress may not pass an extension; the chances “seem slim,” said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former staffer on the Senate Banking Committee.  Public opposition to increasing the federal budget deficit is high, and there’s little appetite on Capitol Hill for finding spending cuts to offset the cost of the tax credit, he said.

If you want to buy, you need to buy now and buy fast … if you expect to get the credit.  If you are motivated to buy because of the credit ... you need to understand that it probably won’t be extended and, even though many are speculating, won’t be increased !

The deficit will total $1.6 trillion this year as revenue falls and the government spends at the fastest pace in 57 years, according to the nonpartisan Congressional Budget Office.

In a sign of the public’s concern about the deficit, 62 percent of people surveyed in a Sept. 10-14 Bloomberg News poll said they would be willing to risk a longer-lasting recession to avoid more government spending.

That is an interesting stat. In my mind, a hopeful stat. People are willing to overcome some short term ‘pain’ (continued recession) for long term gain (healthier economy).

The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association.

“It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify,” he said. “If you haven’t started building it by now, it’s too late.”

Recovery Signs

To be sure, some economists are betting the housing recovery is here to stay.  The market has “clearly bottomed,” said Dean Maki, chief U.S. economist for Barclays Capital in New York. (P.S., sounds like he never heard of a double-dip recession with a side of credit crunch).

Even some of the optimists are hedging their bets given how dependent the market has been on government and central bank support.

“I’m right in there with the rest of the cheerleaders, but there are no historical anecdotes, no historical data points to use for this,” said Lewis Ranieri, the 62-year-old mortgage- bond pioneer who is chairman of New York-based Hyperion Partners LP.  The U.S. housing market is “still very fragile.”

What this means to Buyers:  Buy now to lock in the Federal tax credit and the Georgia statewide tax credit.  Home prices and interest rates are in your favor.

What this means to Sellers:  Put your property on the market now so that buyers can take advantage of the tax credits, lower interest rates, and lower inventories - before it is too late. Today's market will likely be better than the market in 2010.

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