Tax credit lifts housing market

By Marilyn Lewis

Just as Cash for Clunkers helped pull automakers off the recession's rock bottom, a tax credit of up to $8,000 for first-time homebuyers is kick-starting the housing market.

Sales are up -- existing-home sales in July rose 7.2%, the largest month-to-month increase since 1999 -- and prices seem to be stabilizing. The S&P/Case-Shiller U.S. National Home Price Index of 20 cities, released today, showed its first quarterly increase in three years, and the Federal Housing Finance Agency's quarterly report (.pdf file), also released today, found purchase prices in 300 cities down less than 1% from the first quarter.

Housing experts credit three things: the $8,000 incentive, ultralow interest rates and a drop in home prices -- in some cases by as much as 50%. On the lower end of the market, that's meant multiple offers, even bidding wars, in some places.

Most of those sales are of lower-priced, starter homes. In late June, the National Association of Realtors measured a 39% increase in the sale of homes under $100,000 and a 9.4% rise in sales of homes priced between $100,000 and $250,000.

"We have had one of the best purchase markets in the lower end that I can recall," said CEO Leif Thomsen of Mortgage Master, an independent mortgage lender. "Normally, the summer is a very quiet time, and yet we are having record closings for purchases in July and August.

"Without it (the tax credit), we wouldn't be nearly where we are at this point."

Prices down for year, up for quarter

Though the S&P/Case-Shiller National Home Price Index dropped 14.9% from this time last year, it was a big improvement compared with the home-value record losses of 19.1% in this year's first quarter.

"This is the first time we have seen a positive quarter-over-quarter print in three years," said David M. Blitzer, the chairman of the index committee at Standard & Poor's. He spoke of "hints of an upward turn from a bottom."

Right now, prices are where they were in early 2003, he said. However, Blitzer pointed to "continued weakness" in some hard-hit cities. Detroit and Las Vegas, where prices have fallen from their 2006 highs by 54.3% and 45.3%, respectively, are "struggling severely." They were the only two cities measured whose values fell from May to June.

The Federal Housing Finance Agency's national home price index, which measures prices slightly differently and does not include mortgages over $417,000, showed values falling 0.7% nationally from the first quarter to the second quarter and 6.1% compared with this time last year. This, too, was hailed as good news because, though home values continued to fall, they dropped more slowly.

"This is further evidence that prices may be stabilizing for the nation as a whole," agency chief Edward J. DeMarco said.

The FHFA singled out New England as the weakest region in the U.S., with a 1.6% drop in prices from the first to second quarter. Strongest was the oil-rich West-South-Central region, including Oklahoma, Texas, Arkansas and Louisiana. There, home values grew 0.2% in the second quarter.

Credit produced immediate bump

The government's $8,000 tax credit targeted first-time buyers (technically, anyone who hasn't owned a home in the past three years) because they're unencumbered with homes to sell and could respond quickly to a stimulus.

"The tax credit was passed in the middle of February, and we saw an almost immediate response in housing starts, one that we expected, but not as early as it occurred," said David Crowe, the chief economist for the National Association of Home Builders. Monthly surveys of builders show that "the credit is working; they are getting traffic, and they are getting sales from customers using the credit."

Six in 10 real-estate agents told the National Association of Realtors, in a recent poll of 2,000 members, that the tax credit was attracting buyers who would not otherwise have purchased a home.

Christian Menegatti, the head of global economic research for RGE Monitor, a financial-analytics company, agreed. "The improvements we have seen in existing-home sales have been very much explained by the tax cut. Not all, but very much," he said. "We are looking for this trend to continue through October" -- until just before the credit expires Nov. 30.

The homebuilders and Realtors groups are lobbying to extend the credit into 2010 and include more buyers, not just first-timers.

Tax credit doesn't get all the credit

Helping boost sales at the lower end of the housing market were low interest rates and low prices. The national median price fell to $181,800 in June, down 15.4% from the year before, when it was $215,000.

"The tax credit helps but, when you look at everything, this is one of the most-affordable periods in history," said Jerry Maguire, a senior loan officer with Mortgage Master's Walpole, Mass., office. "It's not unheard of for a first-time buyer right now to get a decent house at $250,000, where the same house was selling a few years ago at $375,000."

Continued: A fragile recovery

First-time buyer Denise DelSignore, 37, for example, said she had been looking in the Boston area for the right home for about a year and that, though she could have kept on looking, the availability of the tax credit incentive gave her the goal of pulling the trigger before the November deadline. She put 20% down on the purchase of a recently remodeled two-bedroom, one-bath, 1,550-square-foot, two-story home for $275,000 in North Attleboro, Mass., and she got a mortgage with a 5.5% interest rate. Despite competition from another buyer, she managed to bring the sellers down from their asking price of $290,000.

"It was the best house that I had found in my price range, and I was concerned that if I didn't act on this one, I wouldn't close in 2009 and wouldn't have been able to take advantage of the tax credit," said DelSignore, who manages a portfolio of commercial real estate. (To learn how the tax credit works, read "Got $2,500? Buy a house.")

Despite the runaway success of the tax credit, bridge loans meant to help buyers like DelSignore get the tax credit money in time to make a purchase have been mostly unavailable, according to the Realtors group. "Few (FHA-approved) lenders are currently offering these bridge loans," says the Realtors' Web site. (Read more here.) State housing finance agencies also offer the loans, but they've been hampered by limited funds.

Fragile recovery

All this is not to say that that the severe housing downturn -- or the recession -- is over. (Read "When the recession will really end.")

"As an economist, I'm concerned we haven't built the momentum we need to go from this induced demand to real demand," said Crowe, of the homebuilders group.

Even if the increase in sales can be sustained, prices may keep falling for a while. Menegatti predicts an additional 10% drop in the national median home price, for a total 40% loss in home values from their peak in 2007. Other economists believe prices may have bottomed. As with all wisdom on housing, much depends on where you live. It's not at all certain, either, that sales will stay strong once the tax credit expires.

Other problems that have the potential to drag housing back down include:

• Unemployment. Joblessness continues to be a serious threat to any housing recovery because it is the biggest reason for foreclosures. Unemployment still is growing, albeit more slowly, with 247,000 jobs lost in July compared with an average of 645,000 a month in November through April, according to the Bureau of Labor Statistics' most-recent report.

• A glut of homes for sale. In June, the latest figures available, housing inventory was at 9.4 months, meaning it would normally take that many months for all the homes for sale to be purchased. Inventories hit a peak of 11.3 months in April 2008 and were at 11 months in June 2008, so there has been progress. But a "balanced market" -- six to seven months' supply -- when buyers and sellers have about equal leverage is far away and was last seen in early to mid-2006, as housing was starting to cool off. At the bubble's height, in December 2004 and January 2005, inventories were at a four- to five-month supply.

• Foreclosures. As people lose jobs, they continue to lose their homes. RealtyTrac reports that 1.5 million received foreclosure notices in the first half of this year. Some observers worry that banks are sitting on lots of repossessed homes now, waiting to sell them after the market picks up, which could depress prices further. But Paul Bishop, the National Association of Realtors' managing director of survey and market research, said that may not be as bad as it sounds, given buyers' current appetite for repossessed homes. "It goes back to Economics 101," he said. "There's a price for everything."

• Weak banks. Banks weakened by their portfolios of failing loans are also contributing to the fragile economy, analysts say. (Read "The bailout: An owners' manual.") Banks can't recover until the mortgage loans they bought as securities stop failing.

• Tight credit. Banks have begun making more mortgages available to middle-income homebuyers with strong credit, but banks still are blamed for choking credit to homebuilders, and jumbo (over $417,000 in most areas) mortgage lending remains tight. Right now, builders can't get credit to respond to the new demand for entry level-homes, Crowe said.

Despite still-large inventories, demand is growing for small, affordable new homes in some markets. For certain buyers, only a new home will do. "Our builders are telling us they are reducing the size of their homes and curtailing the amenities in order to build to the first-time market, because that's where the action is right now," Crowe said.