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Reports of a rebound in the U.S. housing market have proven premature - just as we warned.
Home sales surged 28% from September to November, giving hope to prognosticators who declared the housing crisis over. But as Money Morning Contributing Editor Martin Hutchinson pointed out in a Dec. 31 article, sales plunged sharply the month after the government's new homebuyers tax credit was originally set to expire.
Existing home sales plunged 17% to a 5.45 million annual rate in December, taking the wind out of a housing market that was just beginning to show signs of life. The decline in December sales was the biggest since the National Association of Realtors (NAR) began keeping records in 1968.
Existing home sales surprised the markets in November - when the $8,000 tax credit was originally set to expire - by zooming 7.4% to an annual rate of 6.54 million units, the highest since February 2007. But that increase proved unsustainable as ineffective government programs and high unemployment continue to hamstring the housing market.
The homebuyers tax credit has been extended to include deals signed by April 30 and closed by June 30. However, Money Morning's Hutchinson believes that will hardly be enough to salvage future home sales.
"What you will see is another spike in home sales leading up to when the tax credit is set to expire again in the spring," Hutchinson said in an interview. "There will be a small blip around April, but that's all."
The market will languish after that, Hutchinson said, as the U.S. Federal Reserve stops its purchases of mortgage-backed securities and mortgages become harder to obtain. The Fed is scheduled to end its purchases of mortgage-backed securities on March 31.
Indeed, the government initiatives that effectively propped up the housing market last year will come up an abrupt end in a matter of months. And that will be compounded by the fact that Obama administration attempts to keep people in their homes have largely failed.
The government's Home Affordable Modification Program (HAMP) last year failed to stymie foreclosures, which instead spiked to a record 2.8 million. That was a 21% rise over 2008 and a 120% increase over 2007. RealtyTrac expects that lenders will repossess some 3 million homes this year as the U.S. jobless rate clings to the 10% mark.
The U.S. has shed 7.2 million jobs since the recession began more than two years ago and the national unemployment rate stagnated at 10% in December.
The Obama administration set aside $75 billion to subsidize lenders that successfully modify troubled loans by reducing interest rates, extending loan repayments, deferring principle payments for as long as five years and adjusting other mortgage terms.
However, about 25% of homeowners who received trial loan modifications through the plan are failing to keep up with their newly reduced payments, and at least 196,000 borrowers have missed some or all of their required payments.
HAMP, which was designed to help as many as 4 million Americans, has successfully modified just 66,465 loans. And with the unemployment rate lingering in the stratospheric double-digit range, foreclosures will almost certainly continue to plague the housing market.
"None of these programs have really been a success," Vivek Sriram, a mortgage strategist for RBC Capital Markets Corp. told Bloomberg News. "With the high unemployment rate, it's tough to solve the problem because these people will re-default even if their loan terms are fixed."
Money Morning's Hutchinson believes Congress will consider extending at least some of its housing programs, but that will be difficult to do with a budget deficit of $1.4 trillion expected for the fiscal year 2010.
"I don't think we've hit bottom yet," Hutchinson said. "Artificially inflated bubbles such as the housing market don't necessarily deflate the whole way, because the Fed often steps in and does something maniacal.
"At some point, though, either resurgent inflation or soaring commodity prices will force [U.S. Federal Reserve Chairman] Ben Bernanke to raise interest rates. At that point, reality will return to the housing market, too."
News and Related Story Links:
- Money Morning:
Housing Market Still in Shambles as Obama's Loan Modification Program Falls Flat - Money Morning:
Don't Be Fooled by the Housing Market's False Bottom - Bloomberg:
Loan Modification Recipients Fall Short, Drop Out - FinancialStability.gov:
OBAMA ADMINISTRATION KICKS OFF MORTGAGE MODIFICATION CONVERSION DRIVE
The government program HAMP will not work for amny reasons. I have proposed to a couple of congressmen and Senior V.P.'s at a couple of major banks, what I feel is the corrrect way to help alleviate the housing foreclosure situation…long term.
HENCE:
SOLUTION:
A business partnership between banks,the federal government and home owners with upside down mortgages.
Step 1. Banks set up a new loan division that can be called "Equity Loan Participation Program".
Step 2. Banks re-appraise loans currently going into default and re-structures the loan at CURRENT market value with current interest rates amortized over 30 years, with a 5-7 year due date in return for an equity position. At that time the home owner will either re-finance or sell the home to pay off Banks equity position.
(Fail safe clause): Home owner has the one time option to an additional 3-5 year extension in the event hyper inflation has caused interest rates to sky-rocket at the time of re-finance. If a loan extension is needed home owner would increase Banks equity position by 5%
Step 3. Home owner gives Bank an equity position in the future appreciation of property. Estimate (10-15%) .
Step 4. Federal Government offers tax credits to Banks under this program by not making Banks increase their Capital Reserve requirements or cause additional penalties by having to "MARK TO MARKET" these loans on their books under the new loan program "Equity Loan Participation".
Step 5.Federal government gives home owner tax relief from the write down of mortgage which would normally be taxed as "Mortgage Relief" causing a capital gain problem.
Home owner gets a new $350,0000 Mortgage.
Appreciation in most areas of the country should be between 4% to 6% annually over the next five year.
HOME APPRECIATION on $350,000 (using 5% appreciation) =$446,700 (rounded off and compounded)
Bank would earn $9,670 over 5 years roughly 2.76% ( plus interest on new mortgage) and not have costs of foreclosures, more bad loans on books.
(To increase Banks yield Federal Government could also allow this interest to be tax free or deferred).
Home owner would still have an equity position of $87,000.
Creating jobs
Recognizing the fact that 60%+ of our Gross National Product is generated by consumer spending, the economy should be able to move forward without the federal government continuing to print funny money and giving it to companies that should probably be allowed to go bankrupt or bought up by successful competitors. Putting a "bottom" on the real estate market, minimizes anxiety and creates more of a feeling of financial security and in turn will help start consumers spending again, causing manufacturer's to produce and jump start job creation.
(This plan can also work for the now depressing commercial real estate market.
[…] (GDP) growth projected for the second quarter was inventory buildup. Government spending and a temporary housing blip – caused by the homebuyer tax rebate, which expired April 30 – accounted for the […]