The End Is Near?
Let’s see, last April I wrote that “we may look back at April, 2009 as the beginning of the end of the worst financial crisis since the Great Depression.” Then in October, levity seemed to be in order, as I referenced that “watching paint dry must be quicker than the snail’s pace of the economic recovery.”
And now it’s a new year, a time for hope and optimism to lead us into the second decade of the new millennium. Are you feeling energized yet? Not really. After all, how many months have we heard the end is near?
Truth is it really depends on what you read, who you listen too, and what you watch. In each regard, the general consensus among leading economists is that we have turned the corner. But with one in ten of us out of work, it’s hard for many to see light at the end of a very long tunnel. Virtually every positive sign has been followed by a negative. One step forward, two steps back?
Consider statistics from two of the leading economic indicators, home prices and home sales. December, ’09 figures for median home prices showed signs of promise rising to $178,300, up 1.5% from December, ’08. But for the year overall, the median price declined by 12.4% to $173,500, the largest annual drop in 75 years.
Meanwhile, total homes sold in 2009 increased by nearly 5% from 2008, representing the first annual sales gain since 2005. But after three strong months, perhaps the most concerning statistic entering 2010, is that existing homes sales fell by 16.7% in December, the largest such decline in 40 years.
Many argue this dramatic drop is skewed by the notion that many first-time buyers, who accounted for more than half of all sales in ’09, rushed to complete sales before the original November deadline for the First-Time Home Buyer (FTHB) tax credit program. Further, first-time buyers represented just 43% of all buyers in December.
The worse than expected December sales figures happened after Congress voted to extend the credit, apparently easing pressure on buyers to buy before time ran out. The $8000 credit was set to end on November 30th, but the deadline was extended to April 30th of this year, along with a key expansion to include a $6500 credit for existing homeowners who move.
Despite this, the looming question plaguing the housing market now is whether a rocky recovery will falter once the government decides to reduce its support. A year ago, in an effort aimed at keeping mortgage interest rates low and jump-starting the economy, the Feds began purchasing Mortgage Backed Securities (MBS) from Fannie Mae and Freddie Mac, and pledged to continue doing so until the economy had ‘recovered.’
At its December meeting, minutes from the Federal Open Market Committee (FOMC) affirmed its intention to purchase $1.25 trillion MBS “by the end of the first quarter of 2010 and to gradually slow the pace of these purchases to promote a smooth transition in markets.”
In addition, the Committee will “continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”
The pledge to stop buying MBS is becoming an increasing concern for the industry, as some Fed officials fear that doing so will cause mortgage rates to rise and cause an already fragile housing market to stumble, yet again.
Even Federal Reserve Chair, Ben Bernanke (who just last week was approved by Congress to serve another four year term) has stated “there is a lot of uncertainty of what the effect of the Fed no longer purchasing MBS will be. It may become desirable at some point in the future to provide more policy stimulus.” More stimulus? One would hope not.
For now, the great debate centers on concerns that if mortgage rates rise quickly, or the economy shows other signs of weakening, the Feds may need to revisit their plan and continue buying MBS.
Timing is everything, as the saying goes, and the scheduled expiration of the FTHB tax credit at the end of April could also play a key role in the Fed’s decision to act, or not.
But with signs of recovery still dominating the headlines, it’s likely that an exit strategy, of some sort, is still the preferred course of action. Hold on to your seats boys and girls, it’s likely to be a rocky road to the spring.
Chris Beagle is a Senior Loan Officer at Fairway Independent Mortgage Corporation. For more information, contact Chris at 302-260-7090.