Wednesday, January 27, 2010

Home Sales Fall Expectedly

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

U.S. home sales figures for December were out this week. Existing Home Sales fell 16.7% and New Home Sales fell 7.6%. The mainstream media reported the numbers as a surprise. There was nothing surprising about them at all. The U.S. real estate market was being propped up with special government tax credits and when it looked like those credits would disappear at the end of November, homebuyers disappeared with them.

The federal government's tax credit for homebuyers, originally only for new buyers, was renewed until next spring and extended to include people who already own homes. People shopping for homes didn't know that this would happen though, so they rushed to buy before the original November 30th deadline. It looks like the credit accelerated already intended purchasers, rather than actually creating new ones. Existing Home Sales figures started rising in April 2009 (there was a dip in August) and then they fell apart in December after the intended tax expiration date. The drop in Existing Home Sales was the largest in over 40 years.

The U.S. government has instituted a number of programs other than tax credits to directly or indirectly prop up the housing market. HERA - the Housing and Economic Recovery Act of 2008 - resulted in a purchase of an estimated $220 billion in mortgage backed securities by the Treasury Department and is the vehicle for keeping Fannie Mae and Freddie Mac afloat.  The feds provided $300 billion to the FHA for its 'Hope for Homeowners' program. The legislation was signed into law in July 2008 and was considered the solution to stabilizing the housing market; apparently hope was all that was delivered however. The Obama administration's 'Making Home Affordable' program from early 2009 was intended to offer assistance to seven to nine million homeowners with loan modification to prevent foreclosure. How successful have these programs been? New Home Sales fell 22.9% to 374,000 units in 2009 - a record low (sales were at a 1.4 million annual rate in October 2005). So far, foreclosures have hit a record 237,052 in the third quarter of 2009. Figures for the fourth quarter haven't been released yet.

Instead of spending huge amounts of taxpayer money to support the housing industry, it would be best to let prices adjust to realistic market levels.  It was government programs that created the housing bubble in the first place, which in turn led to the Credit Crisis. Home prices went to unsustainable levels based on historical trends. They need to come back down to those trend levels before the market can start a true recovery. Until that happens, the market will have to have continual government money pumped into it to keep sales and prices up. Even then, the housing situation can continue to deteriorate - and it shouldn't be unexpected when it does.

Disclosure: None

NEXT: The State of the Union for Investors

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

Kate DuBois said...

Interesting perspective. I keep wondering when the Feds are going to issue a blanket slash in home values. I'm new to real estate investing and learning how impt. understanding these federal programs are. One of the experts who has been helpful is N. Xavier Arnold at Real Smart Investor about how to manage the market in these times. Thanks for the update.