The program that gives first time home buyers an $8,000 tax credit is due to expire at the end of November.
The Federal Reserve will talk about winding down its buying of mortgage-backed securities in its two-day meeting this week.
Will that be the end to the rally that saw new-home sales rise 9.6% in July from June? That’s the biggest sequential month to month jump since 2005. And that saw stocks of home builders such as D.R. Horton (DHI) and Lennar (LEN) soar 40% and 66%, respectively, from July 1 to September 21?
Could well be. The signs aren’t good.
Congress is in no mood to renew the first time buyer tax credit. It might or might not be good policy but lawmakers don’t have any stomach for anything which raises the deficit. Lawmakers may have only a fuzzy grasp of economics and the history of the Great Depression but they can read poll numbers: A Bloomberg News poll conducted between September 10 and September 14 found that 62% of those polled would be willing to risk a longer recession to avoid more government spending.
(Did you get surveyed? Me neither.)
The home building industry looks like it has started to anticipate an end to the tax credit. To qualify for the credit, you need to buy a house before December 1. Since it takes about four months to build a house, nothing started after August 1 will find a buyer before the current credit expires.
So guess what? Single-family new housing starts fell 3% in August, according to the Commerce Department. That was the first decline since January.
And since first-time home buyers have accounted for 43% of sales since the tax credit went into effect in February (that’s up from 32% before the credit passed as part of the stimulus package, according to the National Association of Realtors), I don’t think the industry is going to be in a hurry to ramp up starts until it sees whether or not there is a drop off in demand.
The Federal Reserve could pick up the slack by buying more mortgage-backed securities and forcing down mortgage rates some more, but the Fed looks like it’s moving in exactly the opposite direction. The question likely to be debated when the Fed meets tomorow and Wednesday isn’t whether or not to expand its buying program, but whether or not to end it before it’s scheduled to lapse at the end of the year.
The Federal Reserve is scheduled to buy up to $1.25 trillion in mortgage-backed securities. So far it has purchased $860 billion.
One problem facing Fed chairman Ben Bernanke is that even with all this buying, the Federal Reserve hasn’t been able to make mortgage money especially cheap. The interest rate on a 30-year mortgage fell to 5.04% last week but that’s not cheap if you remember that the Federal Reserve has set short-term interest rates at just 0% to 0.25%.
The yield on mortgage-backed securities is now about 1.4 percentage points above that on 10-year U.S. Treasury notes. If the Federal Reserve stopped buying these securities experts say yield would rise about 0.5 percentaqge points. And that would send mortgage rates for home buyers climbing as well.
You can think of the decision not to extend the tax credit and to let the Fed’s buying program end on schedule as a grand laboratory experiment. Let’s withdraw this support and see if the housing sector has really launched a sustainable recovery or if it will head down into a second bottom.
Exciting stuff to be sure. But do I have to be one of the lab rats?
sjmaerz,
I’ll do both…the representative in 2010 and by the way, I went into the bank today and they had a new guy sitting in the seat! I got a chuckle out of that and really laughed when I read your post! My CPA explained it. I have to sell one first before I can buy another.
Home values are in the tank. Only time and applying lessons learned will fix that.
bobisgreen, your “representative” doesn’t know how the first time home buyer’s tax credit works? Anyone in the housing or banking industries that doesn’t understand how this credit works should be in another industry. Tax credits don’t get too much easier to understand and this credit was more than well intentioned, it did exactly what it was intended to do. The question is what will happen once it stops working. I am afraid that without incentives or low interest rates, the housing market will continue to come apart. I think you need to find a new reprensentive Bob, and maybe a new bank while you are at it.
I still hear educated estimates of a 10-25% further housing price drop, so that even a 5.08%, 30-year fixed mortgage is no bargain, forget he $8,000 credit.
Unbalanced prices of existing homes will also delay recovery: the cost of an average home in my neighborhood is $300,000. The house to my right was sold at $195,000 and the abandoned (lis pendens) property to my left still owes roughly $350,000 on its loan. I don’t see the empty house coming to market until the lender can recoup more on the loan.
Supply of larger homes grows exponentially on up the price ladder. Further compounding the problem is that the bulk of the aging US population is downsizing their home purchase for a variety of reasons. One is that jumbo loans are hard money to come by.
The current “recovery” doesn’t exist.
This may be one of those “climb out on a limb” moments for me because I have a very simple mentality; don’t spend more than you have in the bank! I know, silly me, the govt. doesn’t operate that way. I suppose the thing I get steamed about is stupid, stupid spending on crap that makes no sense. If you’re going to “stimulate” (spend) then do so in order to create the intended effect! At least the $8000 credit was a well intentioned idea. After doing some checking around on my own, no one in the housing or banking industry knew how it worked! My representative surely didn’t! I’m still waiting for infrastructure stimulus, something other than “clunker” stimulus, something that will make more of an impact than it has already. Maybe then I’ll go along with spending $ I don’t have (called a deficit). That’s my rant for the month.
Good take on the housing market. If you look at the cost to build and the purchase price of forclosed or spec builders that are in deep water. It is cheaper to buy a existing home than to build a new one in a lot of markets. The only people who are buying are people with excellent credit and cash. I t shall be interesting to watch.