May 2010: Tax credit expiration removes crutch | Eastern North Carolina Now

    As a real-estate broker, I am often approached with the question: Has the housing market hit bottom? Even though I want to present the housing market as stable so that I can sell houses, I have to answer, simply: No.

    Home prices nationally fell 3.8 percent in the first quarter of 2010 from a year ago and 1 percent from the previous quarter, according to a new report from Zillow.com. After 30 months of straight declines in home prices since August 2006, the United States may be 6 percent undervalued as a nation. Expect home prices to continue to fall as the market absorbs the new wave of foreclosures and, then, the shadow inventory of foreclosures, which will become apparent once the backlog of bad loans that either weren't approved for modification or obtained modification, then re-defaulted, is squeezed through the pipeline.

    Even though homes are becoming more affordable, sales are expected to be slow. Buyers are currently uninspired to sign contracts due to the increasing supply of homes, a continued drop in values, mortgage unavailability and tentative employment.

    Though the month of March saw a 27-percent increase in new home sales, I'm unconvinced we're close to real recovery. More likely, this rise in sales was the short-lived result of temporary circumstances: the beginning of spring, the April 5 increase of the FHA's upfront premium and the last weeks of the Extended Homebuyer Tax Credit.

    Historically, March new home sales are still very low, as can be seen by looking at a 30-year graph:



    The Extended Homebuyer Tax Credit may have provided statistical optimism in March, but don't expect to see this trend continue. Just one week after its April 30 expiration, mortgage applications had fallen 9.5 percent; even as mortgage interest rates unpredictably dropped below 5 percent. Typically, reduced interest rates have the opposite effect of driving people to the banks in search of cheap loans.

    Why would it be any different that particular week? Perhaps confidence in the ability to obtain financing was low due to widespread uncertainty in employment. Even though new jobless claims dropped for the fourth consecutive week, falling by 4,000 claims to 444,000 for the week, continuing claims posted an unexpected rise of 120,000 to 4.63 million, as those out of work still struggle to find jobs. Economists predicted the new jobless claim number to be lower, at 440,000 for the period, but even that number would have been too high. Economists have generally said that new claims need to reach the low 400,000 area for any type of meaningful job growth to take hold. I know we'll all be excited to see those numbers.

    To explain the unexpected decrease in interest rates, another mystery must be unraveled. At the beginning of April, mortgage rates were expected to begin a steady crawl from the current 5.31 percent upwards to 6 percent, their widely predicted end-of-year target. Instead, during the second week of May, the rate on a 30-year fixed-rate mortgage is at 4.93 percent, the lowest level since mid-December, when rates averaged 4.81 percent.

    Economists attribute the unexpected lowering of interest rates to the unprecedented May 6, 1000-point drop in the Dow, which many speculate was caused by investor reaction to the Greek debt crisis. As investors sold off European debt and bought U.S. debt, bond yields and, then, interest rates fell.

    The move toward U.S. securities is not expected to last, and mortgage rates will, in effect, resume their natural course. The short-lived nature of these temporarily low rates should end up being an incentive for would-be buyers to act fast and lock them in.

    Fannie and Freddie, as well as the large, national real-estate company Coldwell Banker, invented incentives to, hopefully, keep sales moving into the summer months. Fannie Mae announced just before the tax credit expired, that it would extend its 3.5 percent seller assistance on its foreclosures to June 30. It was originally supposed to expire May 1. This program gives buyers back 3.5 percent of the final sales price to be used toward closing costs or home appliances. Coldwell Banker came out with a similarly timed sales promotion, Coldwell Banker Extends Benefits of Home Buyer Tax Credit with 'Buyer Bonus' Sales Event, which encourages its sellers to knock 3 percent, up to $8000, off their selling price until July 31. It may sound like an extension of the homebuyer tax credit, but it's really just part of the price negotiation.