By John W. Schoen Senior producer
msnbc.com
updated 12/23/2009 12:15:04 PM ET 2009-12-23T17:15:04
ANALYSIS

The housing market is in the midst of a rocky recovery, but it’s too soon to declare an end to the worst real estate slide since the Great Depression.

That became clear Wednesday, when the government reported that sales of new homes dropped a sharp 11.3 percent, surprising and disappointing forecasters who had expected an increase.

The report dashed cold water on recovery hopes that had been raised Tuesday by news that sales of existing homes picked up sharply last month. But sales of existing homes got a big boost from a tax credit program for first-time home buyers that was scheduled to expire Nov. 30, before it was extended and expanded by Congress.

For technical reasons, the tax break didn’t give new sales the same boost as existing homes in November. That’s because new sales are recorded when contracts are signed, while existing sales are logged when the sale closes. To get the original $8,000 tax credit, buyers had to close by Nov. 30, so new homes purchased in November likely wouldn't have closed in time to qualify.

Although the tax break was extended through April, it remains to be seen whether the housing momentum will carry over into the new year. The uncertainty surrounding the program in the fall could result in some distortion in the monthly numbers, analysts said.

“Existing-home sales are likely to plunge in December,” said Patrick Newport, U.S. economist at IHS Global Insight.

The outlook is further clouded by a big wave of foreclosures that’s expected to break in the next two years.

“We have a tsunami of foreclosures — 3.5 million people who are 60 days delinquent, seriously delinquent, and probably another 3 million after that who are going to reach that stage,” said Yale University economics professor John Geanakoplos. “All six million of those will probably be kicked out of their houses.”

Under the new housing tax credit program approved by Congress and signed into law by President Barack Obama, buyers who have lived in their current homes for at least five years can claim a credit of up to $6,500 on a new home if they sign a purchase agreement by April 30.

Unlike the first program, the new effort could boost the market's midrange and upper end. Because it targeted first-time buyers, the impact of the original tax credit was felt most heavily at the low end of the market. More than 70 percent of November sales involved houses priced under $250,000.

The hope is that by next spring, the housing market and economy will begin showing sustainable growth without the help of the government. The risk is that the tax credit simply moves up future sales without creating new demand.

Although new-home sales account for less than 10 percent of the overall market, they are important because they represent construction and new economic activity.

November's decline, reported by the Commerce Department, was the biggest monthly drop since January, to a 355,000 unit annual rate. Still, there were some bright spots. The median sale price for a new home rose 3.8 percent from October to $217,400, the highest level since May.

A sustained housing recovery will depend on several factors, including a recovery in the labor market. Most economists expect the unemployment rate, currently at 10 percent, to remain close to that level for through next year. Without a paycheck, those jobless workers can’t get a mortgage.

The housing market also faces a stiff headwind from the continuing high rate of foreclosures, which drives down prices and adds to the backlog of unsold homes as lenders put those properties back on the market. Foreclosure filings in the U.S. will hit another record this year, with an estimated 3.9 million notices sent to homeowners in default, according to RealtyTrac. A record 14 percent of homeowners with mortgages are either behind on payments or in foreclosure.

“It looks like builders are having a real problem trying to compete with the depressed prices in the existing-home market,” said Joel Naroff, president of Naroff Economic Advisors.

Despite three government relief programs since the housing market collapsed in 2007, millions of families are expected to lose their homes over the next two years. Under the latest program launched in March, some 760,000 eligible borrowers have been offered modified loans, but only 31,000 of those trial plans had been made permanent as of last month, according to a report this week from bank regulators.

Part of the reason for the poor showing is that mortgage servicers don't have adequate staff and systems to process the increasing number of trial plans, the report said.

Lenders have also been slow to take more aggressive steps, such as cutting mortgage balances to reflect lost home values. Mortgages that were pooled and sold to investors have also created financial incentives for mortgage companies to drag out the process, according to Geanakoplos.

“They are leaving (owners) in their homes longer and longer because (mortgage servicers) realize they can continue to keep their fees coming, even as the people sit there,” he said.

Effective foreclosure relief is only one piece of the housing outlook puzzle. A sustained recovery will also depend on the cost and availability of credit.

Mortgage rates remain below 5 percent, though they’ve been inching up in recent weeks. Those low rates have been engineered largely by the Federal Reserve through its program to buy $1.25 trillion in mortgage-backed securities. About two-thirds of that has already been spent. In its latest regular policy statement, the Fed included a reminder that the program is set to end next spring. It’s not clear whether rates will begin rising after the Fed stops buying mortgage-packed paper.

Low mortgage rates have helped millions of homeowners reduce payments on their existing homes; roughly three out of four mortgage applications in the first two weeks of December were for refinancing, according to the Mortgage Bankers Association. That will help household budgets and shore up consumer spending, but it hasn’t spurred home buying.

Consumer spending rose for a second straight month in November as incomes recorded their biggest gain in six months, the Commerce Department reported Wednesday.

Falling real estate prices also have helped boost demand for homes by making homes more affordable. The median price of existing homes sold in November was $172,600, down 4.3 percent from a year earlier.

The combination of cheap mortgage money and lower prices has pushed the so-called “affordability” index close to its highest level in nearly two decades, according to the National Association of Home Builders.

As prices stabilize, lenders may become more confident about writing new mortgages, helping sustain demand after government incentives expire, said Richard DeKaser, an economist at Woodley Park Research. “I think that we’ll have the baton passed from the public to the private sector as lenders start to loosen up the purse strings," he said.

© 2013 msnbc.com Reprints

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.29%
$30K home equity loan FICO 5.09%
$75K home equity loan FICO 4.52%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.96%
10.96%
Cash Back Cards 16.45%
16.48%
Rewards Cards 15.99%
16.00%
Source: Bankrate.com