The housing market dropped off a cliff in October, as the original Nov. 30th expiration date for the first-time home buyers tax credit approached, according to the Housing Market Monitor of the Center for Economic and Policy Research. Add to that the 6.25% 60-day delinquency rate in the third quarter -- 58% above the level of one year ago -- and you've got a recipe for housing disaster: more foreclosures, slower sales and ultimately a greater decline in house prices.
"With unemployment virtually certain to remain high well into next year, there is little prospect for any sizable drop in foreclosures," Dean Baker wrote in the Nov. 18 issue of the Housing Market Monitor. "As a result, foreclosures will be putting homes on the market at an annual rate of close to 2 million. This is guaranteed to depress prices in a market with total demand of close to 5 million. In short, house prices will almost certainly resume their decline. The only questions are how soon and how fast."Baker's findings were backed by today's report on housing starts from the U.S. Commerce Department which showed housing starts decreased 10.6% to a seasonally adjusted 529,000 annual rate. This drop erased months of gains as uncertainty over the renewal of the tax credit increased buyers' caution.
While Baker does expect that the extension and expansion of the homebuyers tax credit by Congress will give a modest boost to sales, he doesn't think it will have as large an impact as the original credit. "Most potential first-time buyers will have already purchased their homes," Baker wrote. "The extension of the credit to existing homeowners will provide some additional incentive for homeowners to buy a new home now (it also provides serious opportunities for gaming), but this will have little net effect on the market. Most current homeowners who opt to take advantage of the tax credit will put their home on the market, leaving no net change in the balance between supply and demand."
Baker also points out that he expects interest rates to spike between 50 and 100 basis points by spring unless the Fed extends its purchases of mortgage-backed securities past the first quarter. This would mean a 30-year-mortgage would jump to about 6%. That's still well below historical averages, but it could still slow home purchases.
Another factor that could impact housing sales is the behavior of the Federal Housing Administration. The FHA may need to tighten its lending standards now that its minimum capital requirements are below the required 2% of outstanding loans. Right now, the FHA is buying up almost a quarter of all mortgages. Baker estimates that if the FHA cuts back these purchases by 20 percent, about 5% of potential homebuyers would have to find mortgages elsewhere. Since homebuyers usually seek FHA funding when they can't get private financing, there may be nowhere else for them to turn. And if those potential buyers can't get mortgages, that would reduce sales further.
"The underlying glut in housing means that it is only a matter of time before house prices begin to fall again," says Baker. "Delinquencies hit another record in the third quarter of 2009." So if you are thinking of buying a house, be sure it's one you want to live in for years until this market fully heals.
Lita Epstein has written more than 25 books, including The 250 Questions Everyone Should Ask About Buying Foreclosures.
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