The recent slump in housing is making some analysts uneasy about a recovery that many thought sustainable just a couple months ago and comes at a time when the Federal Reserve is nearing the end of a critical, year-long program to support the mortgage market.
“Housing is at a pivotal, ambiguous point,” says Ted Gayer, co-director of Economic Studies at the Brookings Institution.
A spate of recent reports from home sales to mortgage activity has been starkly negative. And, even if some of it can be written off to seasonal patterns, namely weather, the weakness is not what what people expected with the extension and expansion of the government’s homebuyer tax credit that jacked sales for several months last summer and fall.
New homes sales fell to a record low in January, extending a two-month slide; pending and existing home sales were down in December; homebuilder sentiment in January fell back to where it was last June, and mortgage applications have fallen three of the past four weeks,
“The data is telling us that it is weaker than we’ve been anticipating,” says Pat Newport, a housing analyst at IHS Global Insight. “What the housing market has needed all along is a better economy.”
Even the optimists never expected a traditional housing recovery with unemployment stubbornly high, the consumer balance sheet still in repair mode and credit conditions stingy, but right now there’s palpable worry about momentum—especially given a string of solid months in mid- to late-2009.
The Mortgage Bankers Association’s outlook was and remains “fairly cautious,” says Michael Fratantoni, vice president of research. “I think we were getting some false signals in the late summer and early fall, when we seeing some price increase, that were more than the seasonal impact.”
The MBA is expecting a modest year-over-year increase in home sales and housing starts, with prices leveling out.
Global Insight, for one, says it will probably lower its projections for housing starts and new home sales. The homebuyer tax credit, which now applies to repeat buyers and not just first-time ones, “isn’t panning out, its’ not registering," says Newport. “Demand for new housing is a lot weaker than we thought it would be.”
As sales jumped last year, making the tax credit look like a major success, some analysts feared that it would hurt sales later, essentially pushing activity forward. That now appears to be the case.
Bargain Prices Cut Both Ways
Meanwhile, foreclosed properties continue to dominate sales with less than the usual activity in the middle market, where people trade up to new or better existing homes.
“Foreclosed homes are selling at remarkable pace,” says Richard Smith, CEO of Realogy, the national real estate company, whose brands include Coldwell Banker, Century 21 and The Corcoran Group. “People are looking for the value play. The majority of homes are being bought by investors and first-time buyers..
Smith says the government’s mortgage modification program meant to avert foreclosures “is doing nothing more than prolonging the housing recovery. It is doing more harm than good.”
The government’s Making Home Affordable program has led to slightly more than 118,000 mortgage modifications since its inception last April. Some 830,000 people have qualified for a trial modification the program.
Some 4.5 million homes are expected to fall to foreclosure this year, following 2.8 million in 2009. In contrast, existing homes sales for the two-year period will average about 5.5 million.
““In spite of the best intentions, this is not going to work,” says Smith.
Smith remains optimistic, at least through the first half of the year, saying he sees signs of a recovery at the high end and that the overall market needs nothing more than a little help from an improving economy. He’s uncertain, however, about the second half.
All Eyes On Fed MBS Progam
For some analysts, uncertainty is just around the bend. That’s because one of the government’s most successful programs is scheduled to end by March 31. That’s the Federal Reserve’s massive $1.42 billion dollar program to buy mortgage backed securities, MBS, and government agency debt.
The program, initiated about a year ago, lowered 30-year mortgages rates from roughly 6.00 percent to 5.00 percent and in the process narrowed the spread between 10-year Treasury note and long-term loans to more attractive levels. The program created much needed liquidity in the mortgage lending market because private firms were not lending.
The Fed has been gradually slowing those purchases to create, as stated in its January FOMC statement, “a smooth transition” for the markets.
“I do see headwinds in the housing market,” says Scott Anderson, senior economist with Wells Fargo. “The headwinds will intensify. The first real test of that will be the end of the MBS program at the end of March.
The government’s goal is have the private mortgage market pick up more of the lending.
“If you stop doing it, mortgage rates will go up--we just don’t know how much, “ says veteran Fed watcher David Jones of DMJ Advisors.
Rates To Rise But How Much?
The market's range for that increase is somewhat large--between a fifth of a percentage point and a full percentage point. A consensus, however, seems to have formed around half a percentage point. At the worst then, 30-year mortgage rates would be around 6 percent, which is still historically low and thus presumably attractive to borrowers.
“It will have a negative impact, but not a great negative impact,” says Jed Smith, an economist with the National Association of Realtors. “I don’t think it will kill the housing market recovery.”
Another uncertainly is what the Fed does after it stops buying. Does it begin selling its massive portfolio or does it hold it? Does it wait a short or long amount of time to sell? Does it sell gradually, regularly or more aggressively? Does it signal its intentions or not?
“I don’t think the Fed wants to be permanently supporting the housing market,” says Gayer of Brookings. “The longer you stay in the harder it is for the private market to stand up again.”
The problem is no one knows because it hasn’t been done before.
“The Fed is going to be completely winging it,” says Jones of the Fed's overall exit policy.
The Fed is unlikely to change its plans at this point, unless a major negative hits the economy, although some say it should be willing to reconsider at this point.
"The credit markets are still dysfunctional, the banking system is still in distress," says Brian Bethune, chief U.S. financial economist at IHS Global Insight. "There's no new credit flowing. The Fed is obviously getting too impatient about tightening credit."
Future Options
Other economists say Fed Chairman Ben Bernanke signaled his concern about the housing market and implied the Fed was paying very close attention to it in his two appearances before Congress this week.
"The Fed has said it is constantly under review," says Robert Brusca, chief economist with Fact & Opinion Economics. "The Fed may have to revisit it."
That could be as simply as re-entering the market, if interest rates too much.
In addition, industry sources familiar with the thinking of Treasury Secretary Timothy Geithner and Bernanke about the MBS program say they are keenly aware of the downside risk.
"He'[Bernanke] is only going to remove that money if the real estate market can sustain itself," said one source.
"Geithner made it clear they're not going to do anything stupid," said another.
That may be, but there's legitimate concern about the housing market recovery, even including those who rightly called its apparent bottom last spring.
"There's an issue now as to whether we get a double dip in housing--and I think he will," says Jones.
