Can the surge of first time home buyers last?
2009 will go down in history as one of extraordinary government involvement in almost all aspects of the U.S. economy.
TARP, bailouts for the banks & auto makers, hand outs to consumers, cash for clunkers, and the first time home buyer tax credit were some of the programs that came out of the political desperation of the credit crisis.
In terms of the real estate market, 2009 represented the perfect combination of extreme governmental measures to jump start sales along with already drastically reduced home prices. The result was an incredible surge of home buying, especially in the first time buyer price range below $250,000. The inventory of active listings that we have at Homefront LLC is at its lowest level since 2001. The March through October (so far) time period has been the strongest market I have seen since the irrational exuberance of 2003-2005.
The big question now is whether this buying momentum can continue or if we have simply taken away from future demand by
over incentivizing the first time buyer. There is no question that the stimulus that went into the real estate market worked. With foreclosures overwhelming the market and the prospect of a prolonged cycle of lower prices and more foreclosures, the government
acted, first, to stem the foreclosures by underwriting a loan modification program, and then focused on incentives to spur home buyers to reduce the flood of foreclosed homes in the market.
The incentives were very simple. They implemented the $8000 tax credit and then made a rule that it could be counted as part of a down payment for those loans bought by Fannie Mae or Freddie Mac. This was huge. The primary obstacle to first time home buyers is scrapping together the down payment.
Secondly, the Treasury department, for the first time, became a player in the bond market and began purchasing U.S. government bond notes in an effort to reduce even further the interest rates on mortgages. While Ben Bernake and the Federal Reserve had already lowered the discount and federal funds rates about as far as they could go, those are not the rates upon which mortgages are set. By entering the bond market and printing money to directly purchase a trillion dollars worth of bonds, the Treasury department created an extreme and artificially low return on bonds which in turn caused extreme and artificially low mortgage rates.
What effect will all this stimulus have on the future of real estate?
Great question. As of this writing in mid-October the Treasury department is buying the last of its bonds with the trillion dollars it printed for this purpose. The tax credit is scheduled to expire at the end of November, although the realtor associations are lobbying hard for an extension. When the artificial incentives are no longer in place, there is a chance that the market will be slower than what we have seen so far this year. A “cash for clunkers” type hangover. While the cash for clunkers program was also a huge success, the car dealers were quieter than ever as soon as it ended.
If the macro economic picture improves, and the unemployment rate starts to come down, we should be able to maintain at least a stable market without the tax credit and the artificially low interest rates. If the macro economy does not improve measurably than I think there is a clear risk that the real estate market will deteriorate further in the absence of the governmental incentives.
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