Jan 21st 2010 | WASHINGTON, DC | From The Economist print edition

WHEN American house prices finally started rising in June last year, ending a three-year decline, homeowners and economists rejoiced. The steep plunge in values, about 33% nationally from peak to trough, caused widespread damage in the American economy and abroad. The stabilisation of prices turned out to be a precursor to broader economic recovery.

Since bottoming out between May and June, prices have ticked upwards every month, while sales have risen from their recession lows. And yet gloom persists. The pace of foreclosures has not abated, and there has been no improvement in employment in residential construction.

Worse still, the momentum now seems to be ebbing. Mortgage applications for purchases fell sharply in November, to their lowest level since 1997. Confidence among home-builders declined in November for a second consecutive month. And figures released on January 20th showed that new housing construction, which recovered from the record lows of early 2009 to plateau late last year, fell by 4% between November and December. The fear is that prices will soon start to fall again, touching off another round of pain for homeowners, workers and banks.

The stalling housing market can be blamed, in part, on the end of the government supports that have buoyed recovery. Purchases of mortgage-backed securities by the Federal Reserve and the government’s bailed-out mortgage giants, Fannie Mae and Freddie Mac, helped keep mortgage credit flowing and interest rates low. But Fed purchases, the bulk of the support, are due to end in March.

Other interventions are less admirable. A large tax credit originally offered to first-time buyers was extended in November to cover all buyers with incomes under a certain threshold, and to last until the end of April. Although this has boosted sales, it has largely done so by moving them forward (at no small expense to taxpayers). With the end of the programme the bill will come due, in terms of reduced sales.

All told, government support boosted house prices by about 5% last year, according to a recent Goldman Sachs analysis. As their end approaches concern has grown, not least because the underlying fundamentals remain shaky. With many mortgage loans underwater, continuing job losses are pushing ever more households into default. Nearly 3m properties entered foreclosure last year, and filings increased by 14% from November to December. Foreclosures place downward pressure on house prices, contributing to a vicious cycle of economic pain.

In all likelihood, prices will not begin a new and steep decline. Economic output is now growing again, and most economists believe the economy will begin adding jobs by the spring. Equally important, house prices are no longer out of line with fundamentals. Relative to rents, for instance, house prices are now 3% below their long run average using the S&P/Case-Shiller national index. At the peak of the bubble, they were 40% overvalued. But the end of government support will put housing markets under great strain. It is a difficulty the American economy had better get used to.

Jan. 27 (Bloomberg) — Sales of new homes in the U.S. unexpectedly dropped in December, capping the worst year on record and signaling the government’s tax-credit extension has yet to shore up demand.

Purchases declined 7.6 percent to an annual pace of 342,000, marking the fourth decrease in the past five months, the Commerce Department said today in Washington. For all of 2009, sales declined 23 percent to 374,000, the lowest level since records began in 1963.

The falloff following the expected expiration of an $8,000 incentive for first-time buyers indicates the market remains dependent on government assistance. A setback in housing, combined with a jobless rate projected to average 10 percent this year and record foreclosures that will push up supply, may pressure home prices and builder profits for much of 2010.

“It’s going to be a long slog for housing,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “We will see a decline in home prices and there is still a lot of shadow inventory out there that we need to get through.”

Federal Reserve policy makers today retained a pledge to phase out programs aimed at keeping mortgage rates low, bringing an end to another form of government help.

Mortgage Rates

The end of the $1.25 trillion program of mortgage-debt purchases by the central bank on March 31 raises the risk that borrowing costs will jump. The plan helped send the rate on a 30-year fixed loan down to 4.71 percent in early December, the lowest level in Freddie Mac data going back to 1972.

The Fed “will probably stop the purchases and see how things go,” said Shapiro. “If rates shoot up, then they will probably be back in the game.”

Stocks rose after the Fed also pledged to keep interest rates lot to sustain the expansion. The Standard & Poor’s 500 Index rose 0.5 percent to close at 1,097.5. The S&P Supercomposite Homebuilder Index climbed 1 percent.

The government tax credit to first-time buyers was originally due to expire on Nov. 30, which probably caused demand to swell in prior months, economists said. The Obama administration and Congress extended the credit to cover closings through June 30, and expanded it to include some current owners.

Weather Effect

Bad weather may have also played a role in depressing December new-home sales, economists said. Last month was the 14th coldest December and 11th wettest in 115 years of record keeping, according to the National Climatic Data Center, in Asheville, North Carolina.

“December was a pretty cold month and that probably hurt shopping for homes,” said Adam York, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Winter housing data is notoriously volatile.”

The median price of a new house decreased 3.6 percent from December 2008, to $221,300, today’s report from the Commerce Department showed.

Fed Action

Fed Chairman Ben S. Bernanke and fellow central bankers said today they will keep the target rate for overnight bank lending near zero for an “extended period.” Bernanke is also battling to win support from senators considering his nomination to a second term as Fed leader.

Sales of existing homes plunged 17 percent in December, the month after the credit was to end. The decline was the biggest since records began in 1968, the National Association of Realtors said two days ago. For all of 2009, existing home sales rose 4.9 percent to 5.16 million, the first gain in four years.

New-home purchases, while accounting for less than 10 percent of the market, are considered a leading indicator because they are based on contract signings. Sales of previously owned homes, which make up the remainder, are compiled from closings and reflect contracts signed weeks or months earlier.

Rising foreclosures and joblessness near a 26-year high will weigh on any housing recovery. A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values leave borrowers unable to make mortgage payments or sell, according to a RealtyTrac Inc. forecast on Jan. 14. That compares with 2.82 million foreclosures last year.

Lower prices, while supporting demand, are hurting builders’ earnings. Record foreclosures have depressed the value of the previously owned homes that compete with new houses, prompting construction firms to also lower prices.

Lennar Corp., the third-largest U.S. homebuilder by revenue, reported a 29 percent decline in revenue in the quarter ended Nov. 30 even as profits rose due a tax benefit and cost cuts, the company said Jan. 7.

Businessweek

Home sales in the Midwest declined from November to December, but ended the last month up 9 percent from prior-year levels, the National Association of Realtors said Monday.

There were 86,000 sales in the 11-state region last month, with a median sales price of $173,600, up almost 4 percent.

That was slightly weaker than the national trend. Total home sales across the country were up nearly 15 percent in December, without adjusting for seasonal factors. The median home price nationally gained nearly 4 percent, to $225,400.

Buyers “are still making incredibly conservative decisions,” said Linda Hart, an agent with Re/Max Traditions in Cleveland. She said doctors moving to the city to work at the Cleveland Clinic for a couple years often used to buy a house, for example, but now rent for fear prices will continue to fall.

Sales fell in nine of the 12 major Midwestern cities tracked in the Associated Press-Re/Max Monthly Housing Report, also released on Monday.

Eight of the cities showed median sales price gains over December 2008, including a nearly 32 percent jump in Detroit. The AP-Re/Max report tallies sales by all real estate agents in the metro area, regardless of company affiliation.

Here are some of the highlights from the region:

– Biggest sales decline: Cleveland home sales declined 19 percent annually in December 2008 — the biggest decline in the region.

Hart said she stayed busy throughout the fall because of the homebuyer tax credit — which covers sales contracts signed by April 30 and completed by June 30. She also said sales in the suburbs on the east side of Cleveland, where she primarily works, remained stronger than citywide numbers show.

“I’m hoping there will be people that missed the first one that will buy this spring,” she said.

But sales remain hard to predict because of the economic uncertainty.

Wichita sales dropped 15 percent and Omaha sales fell 14 percent in the region’s only other double-digit annual declines.

– Biggest sales increases: Chicago sales jumped 50 percent over the previous year in December to lead the region.

Jim Merrion, regional director of Re/Max Northern Illinois, said the homebuyer tax credit helped boost home sales in late 2009.

Median home prices in Chicago declined 8 percent to $178,500 in December. Merrion said the price declines have been painful but may have been necessary to bring inflated home prices back within reason.

“We’re seeing some extraordinary bargains in the market right now,” said Merrion, whose firm serves most of northern Illinois.

Detroit and Des Moines were the only other cities to record sales increases, and both those increases were less than 5 percent.

– Biggest price gains: The median home price in Detroit soared 32 percent between December 2008 and last month to hit $70,000.

Conrad Chojnacki, with Keller Williams Realty, said the overall numbers for Detroit can be misleading because of the vast differences between areas of the city and its suburbs.

The Detroit market is still seeing a lot of foreclosures and short sales because people who owe more than their homes are worth want to unload them, he said. Those kind of sales have hurt home prices in the area.

“It’s difficult to try and figure out what the value really is,” Chojnacki said. “A lot of people are still shocked at how much their home is worth.”

But still Chojnacki remains optimistic.

“It’s been a tough market,” Chojnacki said. “I’m confident it’s going to get better, but in southeast Michigan, it may take longer than the rest of the country.”

– Shrinking inventory: All 12 cities reported smaller inventories in December, compared to a year earlier. Wichita posted the smallest decrease with 4 percent fewer homes on the market while Detroit saw the biggest decrease with 35 percent fewer homes up for sale.

ChicagoTribune.com

SAN FRANCISCO—California’s inventory of unsold, previously owned homes shrank to a five-year low in December, in another sign that the state may be coming out of its worst housing slump in decades.

The supply of unsold single-family homes dropped to 3.8 months from 5.6 months a year ago and 16.6 months in January 2008, when inventories were at a peak, according to estimates released Friday by the California Association of Realtors. The inventory levels are now at their lowest level since 2005, resulting in frenzied sales with multiple offers in some cities.

In Northern California’s Santa Clara County, where inventory has dropped to 50 days from 243 a year ago, Amanda Garcia said she and her 62-year-old father Luis Garcia finally gave up a nine-month search for a home last month, after they kept losing out on homes priced in the highly competitive sub-$500,000 market.

“It’s more like an auction nowadays,” said Ms. Garcia, 26, a medical coordinator from Milpitas, Calif. “They shouldn’t call it a house sale.”

California’s housing market is closely watched because it is the nation’s biggest and helps fuel both the state’s economy and the national building industry. With California still weighed down by economic problems, including a 12.4% unemployment rate, higher than the 10% rate nationwide, economists are looking at bellwethers like housing to determine when California will rebound.

Of course, any long-term revival in housing will depend on California’s ability to shake off its high unemployment and the continuing threat of more foreclosures. Some housing experts cautioned that inventories may be artificially low because many would-be sellers are waiting for the economy to improve before putting their homes on the market.

“I’m convinced that once the general public believes prices have bottomed out and are coming up, more people will put their homes on the market,” said Andrew LePage, an analyst at MDA DataQuick, a housing-data provider in La Jolla, Calif. “And that will probably coincide with the economy and job market improving.”

Although most home prices remain well below their pre-bust highs of three years ago, California’s overall housing market has shown signs of stabilizing since early last year. The median price of an existing, single-family home rose 8.4% from a year ago to $306,820, marking the second consecutive year-over-year increase and the 10th straight month-over-month jump, according to estimates by the state Realtors’ association.

Sales rose at a slower year-over-year rate of 1.7%, compared with double-digit gains in recent months. Sales have been powered, in part, by a federal tax credit of $8,000 for first-time buyers, which Congress extended until the end of April.

Some brokers attributed the sales slowdown to lean inventories. “Right now, we need more listings,” said Lianne Pinkston, a Coldwell Banker broker in Morgan Hill, Calif., south of San Jose. “I have an all-cash investor, and they’ve wanted to buy a duplex or four-plex, and they’ve been making all-cash offers for over the asking price, and they’re still not getting anything.”

The current inventory rate is running well under California’s historical average since the 1980s of about an eight-month supply of existing homes on the market. That’s partly because a once huge supply of foreclosures in the state has dwindled. In November, foreclosed properties accounted for 40% of all single-family sales, new and used, in California, compared with 58% in January, according to the most recent estimates by Zillow.com, a market tracker.

In general, California’s coastal markets performed better than inland markets. In Orange County, for example, Zillow estimates foreclosures dropped by more than one half to 20.6% of all single-family sales in November from 43.5% in January. In inland Merced County, foreclosures were also down, but to 69.9% of sales from 83.4% in January, according to Zillow.

The return to the kind of bidding wars that marked the state’s boom years in some coastal cities hasn’t been welcomed by home buyers. In Orange County, graphics designer Scott Butler put in one of 37 offers on a three-bedroom, two-bath home listed for $350,000 in early September. Mr. Butler bid full price for the home in Mission Viejo, Calif., and offered to put 20% down, but the winning bid went over $430,000, said his agent, Michael Caruso.

Mr. Butler, 39, who has since given up his search, said he was outbid on more than 20 other homes since early 2009. “It’s very discouraging,” he said.

Wsj.com

WASHINGTON – Sales of previously occupied homes took the largest monthly drop in more than 40 years last month, sinking more dramatically than expected after lawmakers gave buyers additional time to use a tax credit.

The report reflects a sharp drop in demand after buyers stopped scrambling to qualify for a tax credit of up to $8,000 for first-time homeowners. It had been due to expire on Nov. 30. But Congress extended the deadline until April 30 and expanded it with a new $6,500 credit for existing homeowners who move.

“It’s ‘exit stage left’ for first-time homebuyers,” wrote Guy LeBas, an analyst with Janney Montgomery Scott.

December’s sales fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million, from an unchanged pace of 6.54 million in November, the National Association of Realtors said Monday. Sales had been expected to fall by about 10 percent, according to economists surveyed by Thomson Reuters.

The report “places a large question mark over whether the recovery can be sustained when the extended tax credit expires,” wrote Paul Dales, U.S. economist with Capital Economics.

The median sales price was $178,300, up 1.5 percent from a year earlier and the first yearly gain since August 2007. However, some of that increase could be due to a drop-off in purchases from first-time buyers who tend to buy less expensive homes.

Sales are now up 21 percent from the bottom a year ago, but down 25 percent from the peak more than four years ago.

The big question hanging over the housing market this spring is whether a tentative recovery will stumble after the government pulls back support. The Federal Reserve‘s $1.25 trillion program to push down mortgage rates is scheduled to expire at the end of March — a month before the newly extended tax credit runs out.

Last year, first-time buyers were the main driver of the housing market, but their presence is on the decline. They accounted for 43 percent of purchases in December, down from about half in November, the Realtors group said.

The inventory of unsold homes on the market fell about 7 percent to 3.3 million. That’s a 7.2 month supply at the current sales pace, close to a healthy level of about 6 months.

Total sales for 2009 closed out the year at 5.16 million, up about 5 percent from a year earlier. That was the first annual sales gain since 2005. But prices fell dramatically last year, declining 12.4 percent to a median of $173,500, the largest decline since the Great Depression.

Though the results missed Wall Street’s expectations, the Realtors’ group says there are signs the market is finally stabilizing.

“There is some sustainable momentum building in the housing market right now,” said Lawrence Yun, the group’s chief economist. However, he cautioned that the recovery will depend on whether the economy starts adding jobs in the second half of the year.

Many experts project home prices, which started to rise last summer, will fall again over the winter. That’s because foreclosures make up a larger proportion of sales during the winter months, when fewer sellers choose to put their homes on the market.

Despite fears that home prices are starting to fall again, some analysts still believe the worst is over.

“We do not believe it is fair to consider this a double dip in the housing market,” Michelle Meyer, an economist with Barclays Capital, wrote last week. “The recovery is still under way, but hitting some bumps in the road.”

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