Monday, September 21, 2009

Housing: "Facing a triple whammy" at end of Year

by Bill McBride on 9/21/2009 08:43:00 AM

"We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”
Thomas Lawler, housing economist
From Bloomberg: Housing Suffering Relapse Confronts Bernanke Credit Conundrum (ht Mike in Long Island) A few excerpts:
The Fed’s purchases of mortgage-backed debt so far this year have dwarfed net issues of such securities by Fannie Mae, Freddie Mac and government-run mortgage-bond insurer Ginnie Mae, which totaled about $440 billion through the end of August, said Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial.

Once the Fed exits the market, the spread between yields on mortgage-backed debt and Treasury securities will have to rise, perhaps by a half percentage point, in order to attract other buyers, he said.
The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association.

“It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify,” he said. “If you haven’t started building it by now, it’s too late.”
Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California.
These excerpts make three key points:
  • The spread between Mortgage rates and treasuries will increase when the Fed stops buying MBS (my guess is about 35 bps),
  • the end of the housing tax credit will probably show up in new home sales data first, and
  • housing is usually one of the key engines of recovery (along with consumer spending). The overall recovery will probably be sluggish because both housing and consumer spending will be under pressure for some time.