By Dr. Lynn Reaser
As some special housing relief programs wind down but another comes on board, concerns have recently surfaced that the housing recovery could be stalling out and might reverse in coming months. After a burst of activity last fall, sales of both new and existing homes have fallen during the last three months.
Some of the recent slowing represents a reaction to the expiration of the 10% tax credit (up to a maximum of $8000) for first-time buyers late last year and bad weather in January and February. But, the lack of job growth has also probably been at work.
The housing market will soon lose some of its policy props. The Federal Reserve will end its $1.4 trillion purchase program of mortgage-backed securities and housing agency debt at the end of this month. The extension of last year’s tax credit and broadening to include repeat buyers will end on April 30. However, mortgage rates show little indication of moving much in response to the Fed’s exit and the extension of the tax credits do not seem to be having much of an impact stimulating sales activity.
Late last week, the Obama administration launched a $14 billion program to encourage more mortgage loan modifications, targeting the approximately 11 million (one quarter of the total) that are underwater (i.e., where the value of the home is less than the amount of the mortgage). The program will also focus on mortgage holders who have lost their jobs. The success of these efforts could be muted since it will depend on the voluntary efforts by lenders. The $75 billion Home Affordable Modification Program was aimed at helping 4 million households avoid foreclosure. Only about 170,000 homeowners saw permanent loan modifications. About 60% of the loans that were modified at the end of 2008 defaulted within a year.
Despite the ending of some of the federal programs and questionable success of another initiative, the U.S. housing market should improve in 2010. Mortgage rates should remain well below 6.00%, while the drop in housing prices has dramatically improved affordability. Most importantly, the job market should begin to show signs of health, beginning with the report for March.
Housing’s recovery will not be smooth or even, but it should continue over the coming year.