25 January 2010
“Like a carnival free-fall ride that stops suddenly, teasing riders into a false sense of safety before plummeting the rest of the way to the ground, some economists say the housing market could once again be headed for a plunge after slowly clawing back some of its 2008 losses. A trio of gathering government storm clouds will be responsible for the drop that some predict could mean another 10% to 15% slump in prices, they say.
” ‘Here it is three years after the peak and it’s still all about housing,’ said David Rosenberg, an economist at Gluskin Sheff & Associates in Toronto. ‘The outlook for the market is extremely clouded.’
“The first shoe to fall was last week’s Federal Housing Authority announcement that it would tighten its loan standards in light of defaults that had pushed the agency’s reserves well below its mandated level.
“In an effort to stem the tide of defaults, the agency increased the required down payment for borrowers with the weakest credit, hiked the premium for its loan insurance required of all customers and restricted the amount of closing costs that may be contributed by the seller.
“The FHA has backed more than 30% of loans in the past year as credit tightened and the market for borrowers with questionable credit dried up.
” ‘For a lot of people the FHA was their only resort,’ said economist Dean Baker, co-director of the Washington, D.C.-based Center for Economic Policy. ‘A lot of people who can’t get loans from the FHA will have nowhere else to turn.’
“Up next is the Federal Reserve’s plan to close up shop on its planned $1.25 trillion purchase of mortgage backed securities begun last year. In that time, the government has purchased roughly three quarters of all mortgages that Fannie Mae, Freddie Mac, and Ginnie Mae have turned into securities.
“The Fed’s planned March 31 pullout could send mortgage rates, which have been at historic lows in recent months helping to prop up home sales, up as much as a half to a full percentage point.
“Economists point to the virtual halt in refinancing that occurred earlier this month as rates jumped 0.10 percentage point, helping push demand for refis to a six-month low, as an indication of what could happen.
” ‘Barring a change of course frrm the Fed you will see interest rates start to rise,’ Baker said. ‘That should lead to increases in rates of 0.5 to 1%. It’ll be a gradual increase but that’s enough to have an impact on the market.’
“The third and potentially most damaging blow poised to strike the housing market is the expiration of the federal tax credit for first time home buyers. The $8,000 credit for first time buyers – $6,500 for current homeowners in their houses longer than five years – has helped push sales up more than 15% from December 2008 but is set to expire on April 30.
“The credit was originally scheduled to expire on November 30, 2009, and the market gave a preview of the potential impact last month when existing home sales dropped 16.7% — or more than one million units — from November.
” ‘We’re likely to see a further falloff this spring because of the expiration of the credit,’ Baker said.
“Michael Lea, director of the new Corky McMillin Center for Real Estate at San Diego State University, said the actions by the government will likely mean a strong first quarter of real estate sales with the second half turning negative as rates rise and demand softens.
” ‘The net of it is transaction volume will be more concentrated in the first half and weaken in the second, and house prices are likely to have downward pressure again,’ Lea said, adding that the already-depressed markets of Nevada, Michigan and Indiana will continue to be harder hit than others where the economic recovery may be taking hold more firmly.
“There are other factors that will likely pressure the market as well, said Rosenberg. A glut of inventory – there are nearly nine million homes either on the market currently or vacant after foreclosure and being held off by the bank that owns it – means it will continue to be a buyer’s market.
” ‘The lingering problem in the housing market is still one of excess supply,’ he said. ‘The prospect we could have a 10-15% downfall in residential real estate values is significant.’
“The further drop in value would decimate consumer confidence and lead to more foreclosures as fully one half of all mortgage holders in the U.S. would owe more than the value of their homes.
” ‘That would put tremendous pressure on the government to deal with that environment,’ he said.
“High unemployment is yet another wild card that could pummel housing. As the jobless rate hovers near 10% and the rate of under-employment crests 17%, consumer confidence – and buying power – has been battered. With no clear end in sight to skyrocketing unemployment, the housing market and consumer spending in general are bound to suffer.
“But unlike most sciences, economics is one of speculation and conjecture, so much so that President Harry S. Truman, tired of his economists’ penchant for hedging their forecasts with information from ‘the other hand,’ once demanded a one handed economist.
“Nothing has changed.
“Celia Chen of Moody’s Economy.com said she expects the market to rebound in 2010, and she downplays the effect the government will have on the housing market. Indeed, while existing home sales were reported to have fallen by nearly 17% in December, median prices actually rose for the first time in more than two years.
“The FHA restrictions should have little to no effect, Chen said, because few borrowers have credit scores as low as 580, the threshold at which the agency requires 10% down instead of its traditional 3.5%. It’s uncertain if the Fed will actually make good on its intent to pull out of the mortgage backed market, Chen says, and if the economy does not pick up that decision could be reversed.
“The credit expiration may also have little effect, she said, because the bulk of the buyers eligible to take advantage of it have already done it.
” ‘I think that our outlook is that the housing market will continue improving through this year and the government support that will be fading away will be fading away at the same time the economy is strengthening,’ Chen said. ‘That will help drive demand for homes. If things work out well these policy measures will be in place long enough to get housing past the worst of it.’ “