The Washington Post picked a good day to report on the Obama administration’s decision to end subsidies for mortgage lending that kept home-loan interest rates low enough to incentivize sales. Hours after its report hit the paper and the Internet, the National Association of Realtors announced that December sales of existing homes plunged at the fastest rate since the recession began:
Sales of previously owned U.S. homes fell at the fastest pace on record in December, though prices rose for the first time since the credit crisis began in August 2007, an industry trade group said on Monday.
The National Association of Realtors said existing home sales fell 16.7 percent to an annual rate of 5.45 million units in December, a sharper decline than the 5.90 million unit pace expected.
Overall, sales rose by almost 5% in 2009, but the bad December follows a better than expected November, when resales rose 7%. That increase had people believing that the overall housing market would rebound. The dramatic plunge in December will kill those hopes and leaves the Obama administration fumbling its attempt to extricate themselves from their artificial short-term housing incentives:
The wind-down of federal support for mortgage rates, set to end in two months, is a momentous test of whether the Obama administration and the Federal Reserve have succeeded in jump-starting the housing market and ensuring it can hold its own. The stakes for the economy are massive: If the market again falls into a tailspin, homeowners could face another wave of trouble, and it would deal a body blow to President Obama’s efforts to get the economy on track.
Keeping the mortgage rates at historic lows, which required a commitment of more than $1 trillion, was viewed within the administration as a central plank of the economic strategy last year, senior officials said. Though the policy did not attract as much attention as rescue efforts to bail out banks, it helped revitalize home buying in some parts of the country and put money in the pockets of millions of homeowners who were able to refinance into lower monthly payments, the officials added.
“We did what we thought was necessary to stabilize the market, but we don’t think the government should continue special efforts forever,” said Michael S. Barr, an assistant secretary at the Treasury Department. “As you bring stability, private participants come back in. We do expect this now that the market has stabilized. I’m not going to say there will be no effect on rates, but we do think you are seeing market signs and market signals that there should be an orderly transition.”
A few federal officials and many industry advocates disagree, saying the government is exiting too soon. They offer dire warnings of higher rates and a slowdown in home sales. Fed leaders say they will end a marquee program supporting the mortgage markets in March. Obama’s economic team, led by Treasury Secretary Timothy F. Geithner, has decided not to replace it and has been shutting down its own related initiatives.
Bear in mind that resale figures relate to closings, not purchases. In other words, the resales decisions that get tallied in December are taken more in August, September, and October, depending on how long the escrow was for the resale. As more people lose jobs, fewer are willing to both sell and buy homes, for the obvious reasons. And resale prices fell over 12% in 2009, which makes new houses less attractive for those who want to take advantage of bargains in the housing market. That appears to signal that the next couple of months won’t be any better than December, and could get worse.
Ending these incentives is probably a good long-term idea, but it would have been better to let the market deal with the pain rationally from the beginning. As with Cash for Clunkers, this effort most likely generated far more decisions to move up purchases than to create purchases that wouldn’t have existed in the first place. We could have saved the trillion-plus dollars this program cost, at least in guarantees, to right the deficit problem instead. Now we will just prolong the agony, and spend 2010 with the same kind of instability in the housing markets that we saw in 2009.
Update: The AP doesn’t quite use the word “unexpectedly,” but they come pretty close:
Sales of previously occupied homes took the largest monthly drop in more than 40 years last month, sinking more dramatically than expected after lawmakers gave buyers additional time to use a tax credit.
Well, six of one …