The Commerce Department released the September data on housing starts and permits. Both reports disappointed to the downside as September housing starts increased a benign 0.5% to 590,000 units; analyst expectations were calling for a 610,000 print. In addition, building permits dropped 1.2% in September to 573,000 units. Consensus had forecasted a rise to 595,000 units.
The National Homebuilders Index, Housing Starts and Housing Permits have all signaled a possible retraction for the sector – even with the government’s sponsored $8,000 homebuyer tax credit for first-time buyers.
Analysts had predicted the National Homebuilders Index to rise in October, from a reading of 19 in September. However, the report showed a print of 18; the first drop since February. To add to the negativity, any reading below 50 is a sign that homebuilders feel the housing sector is “poor and weak.”
The housing numbers that came out this week don’t necessarily tell the whole picture.
In fact, home prices have climbed suddenly, a sharp contrast to other housing data.
“The sudden rise in home prices suggests that the psychology of the market has shifted substantially,” Yale professor Robert Shiller, of the Case-Shiller Index, recently wrote in The New York Times.
“But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom.”
Shiller – who correctly called the housing bust back in 2006 – points to natural fluctuation in the housing market to explain much of the recent uptick. He also points out that the government stimulus plan – which provides an $8,000 tax credit for first-time homebuyers – helped juice recent housing numbers.
That government stimulus is scheduled to end Dec. 1 of this year – and, with closing taking 60 days, September should be the last month in which we’ll see effects from the government stimulus plan.
Another Stimulus?
Needless to say, any type of government intervention to extend the credit will be seen as a positive for homebuilders. As Joe Robson, chairman of the National Association of Home Builders (NAHB) and a home builder from Tulsa, Okla., said in a press release obtained by TheDeal.com:
Congressional action to expand the tax credit and extend it for one year would provide a critically needed boost to the employment market and economy, generating nearly 350,000 jobs, $28.2 billion in wages, salaries and business income and $11.6 billion in additional tax revenues. That’s an opportunity we can’t afford to pass up at this difficult time.
Although there is pressure from the builders, as well as would-be homebuyers, the Obama administration is not expected to render a decision on extending the credit for at least a few weeks.
MarketWatch writes, “‘We understand the urgency of this situation,’ Housing and Urban Development Secretary Shaun Donovan said at a Senate Banking Committee hearing, according to Congressional Quarterly. ‘And we believe that within the next few weeks, we will have additional data that will allow us to sit down with [the committee] and discuss whether and how to extend the credit,’ according to CQ.”
More Foreclosures
Further hurting the housing market, foreclosures are hitting a new, more devastating phase.
No longer are sub-prime and marginal homebuyers leading the charge. In fact, real estate research service Zillow.com reports that the top-third of homebuyers now make up 30% of foreclosures, up from 16% in 2006.
The bottom third, by contrast, now makes up only 35%, down from 55% in ’06.
And as adjustable- rate mortgages continue to reset – with 2010, 2011 and 2012 still seeing many ARMs ballooning to larger payments – the trend of more expensive homes being foreclosed looks set to continue.
In fact, only 12% of ARM mortgages have already reset to higher rates, according to Fitch Ratings. Despite that low figure, 46% of ARM mortgage holders are already 30 days delinquent or more, while 94% are making the minimum monthly payment – and thus are negatively amortizing their debt.
“The problem is well beyond subprime and is now deep into prime,” says Mark Zandi, the chief economist for Moody’s economy.com.
ARM mortgages – and their ugly siblings, interest-only mortgages – aren’t quite as large a group as subprime, with an estimated $311 billion defaults on the horizon, compared to the $400 billion subprimes that have thus far gone belly-up.
Obama to the Rescue?
The housing data was “striking fear that the looming expiration of the first-time homebuyer credit spells doom for the nascent recovery in that sector,” Charles Schwab analysts said to The Economic Times.
Subprimeblogger.com reports, “Homebuilder sentiment had been up for three straight months but with government incentives set to expire sentiment turned south.”
The Obama administration is prepared for the numbers to creep downward as well. In fact, AOL.com reports that the “Obama administration is unveiling a new program to provide support to state and local housing agencies to provide help to thousands of homebuyers and renters.
“The administration said the new program would help to support low mortgage rates and expand resources for low- and middle-income borrowers who want to buy or rent a home.”
The government already has in place a program to help homeowners, but it’s widely criticized for not providing enough help. Under the stimulus plan, $75 billion of government money has been set aside to help homeowners. Per OpEdNews, “The majority of it is going to the lenders that are part of the program. The money is covering their costs when they approve a high-risk borrower and to cover the difference of your mortgage loan and the actual value of your property.”
The Federal Home Affordable Program (FHAP) was created to help individuals who could no longer afford to make their monthly mortgage payments. Under the program, they could modify their existing loans to bring their payments down to more affordable amounts.
But whom will this new program really benefit? How much will this new effort cost? And does the American taxpayer have the stomach for more aid?
The Real Winners
The Wall Street Journal notes that the Treasury Department hasn’t put a price tag on this new program yet, but that it will be paid for by state and local housing finance agencies fees.
The taxpayer can’t breathe easily yet, though. The real estate industry is clamoring for an extension of the $8,000 first-time homebuyer tax credit… And it wouldn’t be a big surprise to anyone to see Congress give in to these demands.
MarketWatch’s Rex Nutting writes, “Congress almost certainly will cave under the pressure. After all, there are construction workers and real-estate agents in every congressional district. There's nothing more American than home ownership, as proven by $150 billion in subsidies handed to homeowners every year.”
This homebuyer tax credit has little real impact on the economy. In fact, the National Association of Realtors admits that most of the 2 million new homebuyers that will have taken advantage of this credit would have bought a home anyway.
If the homebuyer tax credit was really behind the stabilization of the housing markets, wouldn’t the industry see an increase in mortgage applications just before the credit expires?
Where’s the Beef?
Well, it hasn’t.
In fact, mortgage applications dropped significantly last week. Not by 1 or 2%… not even by 5%.
CNNMoney’s Julianne Pepitone reports, “The Mortgage Bankers Association said its index of mortgage application volume fell 13.7% in the week ended Oct. 16 from the prior week.”
Mortgage rates also jumped from 5.02% to 5.07%.
So whom does the homebuyer tax credit really help? Try the banks…
From Bloomberg:
Banks’ mortgage units are using gains on mark-to-market adjustments and hedging derivatives to drive earnings as lenders record losses on consumer loans during the worst recession since World War II. Net gains on [Mortgage Servicing Rights] and hedges also added $1 billion to Wells Fargo’s earnings in the second quarter and to JPMorgan’s in the first.
The banks are trying to make money on both sides of the equation, and they’re raking in the dough. Add Citigroup and Bank of America into the mix and you’ve got more than $2 billion in profits from this part of the industry.
Wait until next year when the potential homebuyer tax credit could be expanded to $15,000… And to all consumers who want to buy a home. Then you’ll see who really benefits.
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