Experts fear that the already-battered U.S. housing market is getting ready to stall again, leaving the Obama administration to decide what – if anything – it should do next.
Standard & Poor's Case-Shiller Home Price Indices yesterday (Tuesday) reported that home prices rose 3.6% in the second quarter from a year earlier – but the boost came from the homebuyer tax credit that expired in April. And that doesn't bode well for the housing market's near-term outlook.
"The numbers were inflated by the homebuyer tax credit," David Sloan, a senior economist at 4Cast Inc. in New York, told Bloomberg. "The numbers will be going down in the coming months. We could see some significant declines."
Prices rose a seasonally adjusted 0.3% in June from the month before, but then plunged in July and are expected to keep falling. The National Association of Realtors said that existing home sales in July plunged 27% from the month before – a record decline that dropped home sales to their slowest pace in a decade.
The housing market is typically viewed as a vehicle that can pull the economy out of a recession, because the interest rates that are lowered to help jump-start the economy also encourage housing purchases. This time around, however, that scenario failed to play out: High unemployment and continued uncertainty about the broader economy has undermined the economy.
Other housing-related reports are just as gloomy, and are helping to nurture the uncertainty that's hamstrung economic growth.
RealtyTrac Inc. reported that 269,962 homes were taken from delinquent owners in the second quarter – putting the country on pace to have 1 million homes be seized by the end of the year.
The U.S. Labor Department reported that 61,000 construction jobs were lost from May to July, and another 56,000 positions were trimmed in related areas like furniture, financial services for property, and building supplies. Job creation in housing-related-employment areas slowed to 51,000 a month in the May-to-July period from 153,000 a month in the February – April period, according to a Financial Times report.
Without housing stability, it will be tough for the administration to engineer a successful economic recovery – especially since U.S. consumers are already worried about a "double-dip" recession.
"If foreclosures continue to mount and depress home prices, that could send the economy back into a recession," Celia Chen, an economist who tracks the industry for Moody's Analytics Inc., told Bloomberg. "The housing market and the broader economy are closely intertwined."
To reverse the painful housing decline, the government on Sunday announced more efforts to help financially strapped homeowners stay afloat. It will launch a Federal Housing Authority program to help borrowers who are struggling to pay their mortgages refinance their loans. It will also start an emergency homeowners' loan program for unemployed borrowers so they can stay in their homes, according to Housing and Urban Development Secretary Shaun Donovan.
"We're going to continue to make sure folks have access to home ownership," he said in an interview with CNN.
There's even talk of another tax credit – something not all construction companies and economists are supporting.
"I don't want the tax credit to be re-enacted or be recreated or extended," Donald Tomnitz, chief executive officer of U.S. homebuilder D.R. Horton Inc.(NYSE: DHI) said Aug. 3 to investors. "We want to get back to a normalized market."
But the government is ready to intervene – the question is if it can find something that will actually help.
"All I can tell you is that we are watching very carefully," Donovan said. "We're going to be focused like a laser on where the housing market is moving going forward, and we are going to go everywhere we can to make sure this market stabilizes and recovers."
This brings us to next week's Money Morning "Question of the Week:" Should the U.S. government implement more programs to help stabilize the housing market? Have the programs they have used helped or done more harm than good? Do we just need to let the housing market adjust itself and wait for a return to "normalcy," or will the domino effect of more mortgage defaults and housing price declines hurt the rest of the economic recovery too much to ignore?
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