Housing Recovery Could Falter Once Housing Stimulus Ends

December’s drastic drop in existing home sales suggests that an artificially propped up market recovery lacks legs, raising real doubts about its sustainability. Recovery strides that have largely …

December’s drastic drop in existing home sales suggests that an artificially propped up market recovery lacks legs, raising real doubts about its sustainability. Recovery strides that have largely resulted from the homebuyer credit, and suppressed mortgage rates, could be wiped out once that support is removed. In addition, hopeful signs like a recent decline in housing inventory are offset by continued jobless woes. See the following article from Property Wire for more on this.

Sales of previously owned US property suffered a record drop last month as the boost from a popular tax credit waned, raising doubts that the real estate market recovery can be sustained without government support.

The latest figures from the National Association of Realtors show that existing home sales fell 16.7% in December to an annual rate of 5.45 million units. It was the sharpest decline on records dating back to 1968 and the slowest sales pace since August. Analysts had expected a less severe drop to a 5.90 million unit pace.

‘Today’s numbers clearly indicate that the rebound in housing demand observed so far has been largely supported by government programs and therefore that the recovery is far from becoming self-sustaining,’ said Anna Piretti, an economist at BNP Paribas in New York.

There were, however, some encouraging signs, with the median home price rising in December in the first year-over-year gain since August 2007 and a decline in the inventory of property available for sale.

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The real estate market in the US has been recovering from a three year slump largely due to a tax credit for first time buyers and low mortgage rates, according to analysts. The tax credit, which had been due to end in November, has now been extended until June this year.

But before the tax extension was announced prospective home buyers rushed through sales to qualify for the credit, creating a surge in November. But then there was a lull in December once buyers saw they had an extra seven months to take advantage of the benefit.

Analysts said they are hopeful that extension should boost sales in the coming months but the market could be hit again when it comes to an end. Other figures such as pending home sales and construction data are also adding to concerns that the property market, which has been at the core of the worst US economic downturn since the 1930s, might be slipping again.

‘We’re becoming increasingly concerned that the housing recovery will falter once the tax credit is removed,’ said Paul Dales, US economist at Capital Economics in Toronto.

‘Sales could improve again in the near term as a result of the extension of the homebuyer tax credit and what we expect to be a near term return to job growth. By the middle of the year, however, the housing market will run into some more headwinds as the tax credit expires and mortgage rates probably rise,’ said Abiel Reinhart, an economist at JPMorgan in New York.

Mortgage rates have been kept down by the Federal Reserve’s program to buy mortgage-related securities in the market. The US central bank is scheduled to end the program in March.

One bright spot is that the inventory of homes available for sale last month fell to 3.29 million units, the lowest since March 2006. Analysts argue that reducing the supply of homes for sale on the market is critical for the sector’s recovery.

There is also concern about unemployment rising. ‘The market is going through a period of swings driven by the tax credit. By early summer the overall market should benefit from more balanced inventory and sales are on track to rise again in 2010. However, the job market remains a concern and could dampen the housing recovery. Job creation is key to a continued recovery in the second half of the year,’ said Lawrence Yun, NAR chief economist.

This article has been republished from Property Wire. You can also view this article at Property Wire, an international real estate news site.


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