Monday, March 23, 2009

Some "Stimulating" Thoughts

Some "Stimulating" Thoughts
By Lawrence Yun, Chief Economist, NAR Research

January home sales were down, no doubt due to worsening economic conditions. Job losses have accelerated, household wealth from home values and stock markets has tumbled, and consumer confidence was dismally low. In addition, with so much discussion about the stimulus package since the November election, some serious buyers have been holding back for clarity and certainty regarding the stimulus package before acting.

Now that the stimulus package is passed, home sales, perhaps, will begin to turn around. We are very pleased with the housing stimulus measure of the up to $8,000 home buyer tax credit for first-time buyers. This clean tax credit (without the need to repay) can lift home sales by 300,000 before it expires in December 1st. The additional sales to first-time buyers will also trigger a chain reaction of trade-up and trade-down buyers. Furthermore, the restoration of a higher conforming loan limit means that more people can have access to low mortgage rates. The greater use of TARP funds for TALF operations will also help to keep mortgage rates at historically favorably levels. These policy measures - now certain - should bring buyers to the market.

Supply Inventories generally increase in January after the holiday the season, but they declined 2.7 percent to 3.6 million from 3.7 million in December. The pace of new fresh listings has been dropping, so even with a decline in sales pace, the total listings on the market fell in January. Despite fewer homes on the market, the lower sales activity pushed up the months' supply to 9.6 months. But the 3.6 million homes for sale is the lowest inventory count in two years.

Foreclosure moratoriums in several states and by several major lenders may have contributed to the decline in addition to sales consistently being higher than the new fresh listings showing up on the market since the peak inventory at 4.6 million in July of 2008. A sharp cut back in homebuilding is also lessening inventory build-up. Higher sales resulting from the stimulus could bring months' supply down to 8 months before year's end - which would be consistent with home price stabilization. We should not expect an immediate bump because home buying process takes 3 to 5 months before getting the keys to the house.

Prices: As far as home prices rising, that will likely take longer. The current home price is the lowest since March 2003, but we should careful in reading the data. The high prevalence of distressed home sales and of those in the lower price range has skewed the median price markedly lower than under normal market conditions. Distressed sales, as defined as foreclosed properties or those requiring lender mediated short sales, account for about 45% of all sales. The inventory of distressed properties is much lower -- about 25% of listings. This indicates that buyers are fighting over deeply discounted prices associated with distressed properties. Our internal preliminary analysis suggests that non-distressed properties are holding their value much better. In either case, however, prices and interest rates are reasonable, and housing opportunities have become quite attractive.

One thing is for sure. The economy will not be able to recover in a sustainable way without home price stabilization. As long as home prices continue to fall - that is, if they over-correct significantly beyond what can be justified by fundamentals of mortgage rates, income, and rent metrics - the economy will hemorrhage. Housing demand must first rise to help clear the inventory, which will then help stabilize home prices. Stable home prices, in turn, will lay the foundation for sustainable economic growth and job creation.

It Will Take Time: It is a buyer's market for sure. Buyers have everything going for them: 50-year low mortgage rates, wide inventory selection, tax credit for first-timers, and a record high affordability index. The only thing they lack is confidence. Even so, rising affordability has been associated with rising home sales even in times of recession because about 90 percent of the workforce would still have jobs. Assuming 20 percent of the households with jobs are filled with anxiety about losing those jobs, that still puts us at 70 percent of the workforce with stable employment who can respond to housing incentives. But the home buying process requires several months, from Internet searches for homes, to visiting open houses, to finding the mortgage, to conducting a home inspection, and a myriad of other related activities. Therefore, the kick from the stimulus will not show up in the data until at least May, for which the data will be reported in June/July.

A Potential "Fly" in the Ointment: While most of the media chatter has been about the provisions in the stimulus package, there is another issue on the table. There is a proposal to limit mortgage interest deduction among very high income households, supposedly in order to raise tax revenue and reduce the size of the budget deficit. NAR's position is that this is a wrong-headed policy that will worsen the U.S. economy and thereby lower U.S. tax revenue. Falling home prices beyond the levels that can be justified will lead to consumer spending contraction, rising foreclosures, rising re-default rates on modified loans, and further destruction in the bank balance sheet. Neither the stock market nor the economy can recover in a sustainable way without home price stabilization. Any changes to mortgage interest deduction will apply more pressure for home prices to fall.

NAR has completed a white paper on the impact of the proposed change in the mortgage interest deduction. The bottom line is that middle-and- lower income homeowners will get hit, along with higher-income households in terms of additional destruction in housing equity. Yes, the federal deficit must be addressed. But trying to go after a sector that is hurt and down is a wrong-headed measure yielding counter-productive results. The lawmakers must focus on reviving the housing sector from significantly over-correcting in order to get the economy back on track.

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