This week's shocking existing home sales and new home sales data are a reminder that government support for the housing market is starting to unwind. The bad data we saw this week was just the beginning of a 'hangover' from our recent housing stimulus binge:
Goldman's Jan Hatzius:
The effect of federal mortgage modification programs has also started to wane. Data reported from the Treasury this week indicate that the number of canceled modifications in the Home Affordable Modification Program (HAMP) jumped significantly, while the rate of new modifications has declined to a fraction of the previous pace. Most of these loans have not yet entered foreclosure, and it appears that many will enter non-federal modifications. That said, the effect of this program is nevertheless starting to reverse, from one that absorbed would-be distressed supply from the market, to one that will at some point add it back.
But we still have ultra-low mortgage rates... (In fact, the lowest mortgage rates ever in recorded history)
The third source of policy support for the housing market-low mortgage rates-remains intact, however. While the conforming spread has risen by roughly 30bps from its low point at the end of the Fed's MBS purchases in March, it is still significantly below normal levels. Since most of the effect of the Fed's purchases appears to come from the stock of MBS holdings, we don't expect this source of support to fade soon. However, GSE reform discussions that get underway later this year and become more intense early in 2011 could present a new risk to this last source of temporary policy support.
Still, as government support fades, Goldman is forecasting falling housing prices out to 2012:
Last year, we estimated that federal housing policies-the homebuyer tax credit, mortgage modification programs, and the Fed's MBS purchases-boosted house prices by about 5%, with the implication that the fading of these policies would lead to renewed price declines in 2010. Earlier this month we updated our house price forecast; we expect a 3% decline in the Case-Shiller 20-city index this year and another 1% in 2011 (see Jari Stehn, "House Prices Have Not Bottomed Yet", US Economics Analyst 10/22, June 4, 2010). Reports this week back up the notion that the first two of these supports have begun to fade, though the third remains largely intact:
The homebuyer tax credit hangover is happening:
Collapsing mortgage applications presaging collapsing existing home sales...
Collapsing new home sales...
Basically, don't be surprised if home prices go nowhere, at best, for a long time.
(Via Goldman Sachs, The Unwinding Of Federal Housing Stimulus Is Underway, Jan Hatzius, 23 June 2010)
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