How Soon Until U.S. Withdraws Mortgage Market Support?

Uncle Sam is trying to get out of the business of running the U.S. mortgage market. The trick will be withdrawing support without toppling the nation’s fragile housing recovery in the process.
The government rescued the sector last year with a series of unprecedented measures that staved off a catastrophic collapse, including pumping more than $1 trillion into home loans. But Washington now has effective control of the housing market, either owning or guaranteeing an estimated 9 out of 10 new mortgages.
That has critics worried that the government has asserted too much control over a critical segment of the economy while inflating the federal deficit at what some consider an alarming pace. Pressure is building on the Obama administration to scale back a variety of stimulus efforts.
Federal Reserve Chairman Ben S. Bernanke recently outlined a broad strategy for eventually tightening credit. He talked only vaguely about when the central bank might act, sprinkling his remarks with phrases such as ‘in due course’ and ‘at some point.’ “We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively,” he said.
For the housing market, the plan to scale back support carries an inherent risk: that it could stall the very housing recovery that the government has worked so feverishly to jump-start. “We understand that stimulus can’t continue forever, but at the same time, trying to get the housing market back on track is key to a broader economic recovery,” said Lawrence Yun, chief economist for the National Association of Realtors. “This policy is having that intended impact. Policymakers should be cautious about how soon to end it.”
The Fed plans to end a $1.25-trillion mortgage-bond-purchase program that has helped keep mortgage interest rates near a record-low 5% next month. The Fed has been buying virtually all the mortgage bonds churned out by mortgage giants Fannie Mae and Freddie Mac, replacing private investors such as pension funds and mutual funds that have shied away since the subprime mortgage crisis. That exit is expected to push up rates, which could weigh on buyers at a time of high unemployment and anemic consumer spending.
The Mortgage Bankers Association, an industry trade group, predicts the end of the Fed mortgage-bond program could push rates up by roughly 0.5 %. For a $500,000 fixed-rate mortgage, that would increase the monthly payment by $155.
Even a moderate rise could push potential buyers out of the market.
Higher rates could force many others to recalculate where to live or what to purchase. “If those rates jump up to 5.5% or 6%, then buyers can’t qualify for what they thought they could qualify for, and they’re not going to be able to buy as much house as they thought they could,” said Frank Drury, a loan originator at Cobalt Financial Corp. in Huntington Beach, Calif.
A popular home buyer’s tax credit is scheduled to lapse at the end of April. It provides tax breaks of up to $8,000 to first-time buyers and up to $6,500 for some homeowners who move up to middle-market homes costing up to $800,000. The credits were originally scheduled to lapse in November 2009, but were extended over concerns that home sales would slow without the incentive.
There is already evidence that could occur. In December 2009, home resales skidded almost 17% after buyers sped up their purchases the month before to make sure they qualified for the subsidy before the expiration of the original deadline.
Even with the elimination of the programs, the government would remain deeply involved in housing and would maintain several key pillars that have propped up the market. Those include expanded Federal Housing Administration programs, as well as enhanced support of Fannie Mae and Freddie Mac.
Still, “it is one of what will ultimately be many steps by the government to start to take back its unprecedented support for the housing and mortgage markets,” said Thomas A. Lawler, founder of research firm Lawler Economic & Housing Consulting. “There will be more.”
Ending the Fed’s near-total control of the market could help spur investors to reenter the market. “My sense is government officials desperately want to get out of this program,” said Keith Gumbinger, vice president at mortgage research firm HSH Associates. “The longer this goes on, the less likely that the private marketplace will jump back in anytime soon.”
Falling rates have lured buyers. In Southern California, for example, sales rose 16.4% in December from the previous month and 12.1% from December 2008, according to MDA DataQuick, a San Diego real estate research firm. The Fed’s purchase of “mortgage-backed securities has helped a great deal, and I hope they keep doing it,” said Laura Zajdman, an agent at ZipRealty in Culver City, Calif.
The combination of many factors, including a slowly improving economy, will probably push rates slowly higher, some experts say. “I really think the odds-on bet is that rates are near their lows and they’re more likely to slowly go up from here,” said Walt Schmidt, a mortgage-bond strategist at investment firm FTN Financial in Chicago.

Housing Starts Rise in January

Nationwide housing production hit its strongest pace in the last six months this January, posting a 2.8 percent gain to a seasonally adjusted annual rate of 591,000 units, according to figures released today by the U.S. Commerce Department.

“Builders are starting to see the positive impacts of home buyer tax credits and other favorable buying conditions in terms of consumer demand, and are cautiously increasing production to meet that demand,” said National Association of Home Builders (NAHB) Chairman Bob Jones, a home builder from Bloomfield Hills, Mich.

“As our latest home builder surveys have indicated, today’s excellent home buying conditions – including the availability of tax credits for first-time and repeat buyers, very favorable mortgage rates and stabilizing home values – are helping drive potential buyers back to the market,” said NAHB Chief Economist David Crowe. However, he said, “A continuing shortfall in available credit for building projects is still producing a drag on new construction and slowing the progress of recovery in housing and the overall economy.”

The overall gain in housing starts was reflected on both the single- and multi-family side this January. While single-family starts posted a 1.5 percent gain to a seasonally adjusted, annual rate of 484,000 units, multifamily starts posted a 9.2 percent gain to 107,000 units.

Meanwhile, overall permit issuance, which can be an indicator of future building activity, fell 4.9 percent to a rate of 621,000 units in January. This was due entirely to a 23 percent decline to 114,000 units on the multifamily side, which offset a big gain in that sector the previous month. Single-family permits held virtually even, with a 0.4 percent gain to 507,000 units.

Combined single- and multifamily housing starts rose in three out of four regions this January. The South and West each registered a third consecutive month of improvement, with 1 percent and 8.9 percent gains, respectively, and the Northeast also posted a 10 percent gain. The Midwest saw a 3.2 percent decline in overall housing starts.

Conversely, permit issuance declined in three out of four regions this January. The West was the only region to post a gain, of 8.5 percent, while declines of 17.8 percent, 20.2 percent and 1.3 percent were registered in the Northeast, Midwest and South, respectively.