by Steve Harney on May 4, 2010
Today I want to cover the impact the expired tax credit and the Fed’s exit of the mortgage market will have on home prices as we move forward. Whenever we talk about pricing, we must look at two variables: supply and demand. We covered buyer demand in yesterday’s blog, No Tax Credit. How Will You Wind Up? We determined that demand for residential property could remain rather stable. The supply side of the pricing equation is much more troubling.
The entire government stimulus package for the housing industry had one goal – STABILIZE PRICES. Since June of 2006, house prices had been in a freefall (see graph below). The inventory of unsold homes was surging as concerned sellers put their home on the market and banks were releasing their supply of foreclosures. That was causing such uncertainty in the market that it was dragging down the entire economy. The Fed stepped in and put several programs into place that would help stop prices from declining and inventories from growing.
And to a certain degree, it worked. We can see in the following graph that house prices began to stabilize in early 2009 as the programs were taking hold.
But now some of those initiatives have come to an end and others have disappointed. Let’s take a look at the programs:
Tax Credit and Fed’s Purchase of Mortgage-Backed-Securities (MBS)
The tax credit and the MBS purchase program, which helped lower mortgage rates, have expired. Neither program had anything to do with making homeownership easier for buyers. Their purpose was to increase demand so we could eat into the supply of homes for sale, thus bolstering prices.
This past January, the TARP report was released by the government. It repeatedly expressed the government’s goal to boost home prices. Some examples:
Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices.
The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS.
Similarly, the Administration is boosting home prices by encouraging bank lending (such as through TARP) and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit.
The programs did create, or at least moved forward, a demand for housing. No one believes that it created a momentum that will dramatically drive home purchases this year. The demand side of the pricing equation will remain neutral.
The Assorted Foreclosure Prevention Programs
One reason the modification programs were put into place was to help families avoid losing their homes. Another reason was to try and slow down the wave of foreclosures that were entering the market and driving down prices.
Again we can quote the TARP Report released earlier in the year to make this point:
Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.”
The administration was attempting to control the supply side of the pricing equation. The goal was to prevent 3-4 million foreclosures. How are they doing? Less than 250,000 have been given a permanent modification (see graph below). As of this moment, the programs did not substantially reduce the number of distressed properties coming to the market. It just delayed them from coming to the market until now.
So what will happen with prices?
If demand remains at 2009 levels and supply increases dramatically, pricing will continue to feel downward pressure.
First American CoreLogic released a white paper on this issue last month. Here are a few of their findings:
During the first thirteen months of the Federal Housing Stimulus programs, home sales and home prices stabilized.
It is likely that the collective set of federal programs, including the home buyer tax credit, Federal Reserve MBS purchases, and Federal foreclosure prevention programs (HAMP, HARP, HAFA), contributed to the housing market stabilization.
Under a simulation scenario of Federal support ending in April 2010, home prices are expected to decline by more than 4 percent year-over-year in February 2011.
What does this mean to you?
If you are thinking of selling, do it now. If you are thinking of buying, waiting might seem to make sense. But remember you must keep an eye on the interest rates.