Once it was a house on fire.
Then a full house.
Eventually, a house of cards.
The sharp growth of the housing market and steep rise in home values piloted an unparalleled rise in individual prosperity from the late 1990s through mid-2007. This personal sense of affluence led to unprecedented credit, leverage and investment. All of which was reflected in a stock market that rose to heights never seen.
Not surprisingly, when the housing bubble imploded, the entire economy was sucked into its collapsing vortex.
Eighteen months after the fall of Lehman Brothers and a recession that has seen in excess 2 million American families lose their homes with millions still facing foreclosure, policymakers must decide whether the housing market has regained sufficient stability to withdraw the government’s extraordinary support measures.
A Return to Normal?
Tomorrow, all eyes will be on the Federal Reserve as its rate setting Federal Open Market Committee (FOMC) gets ready to commence it bi-monthly two-day meeting.
From his recent public comments, it appears Fed Chair Ben Bernanke believes that the housing market is poised to rebound later in the year, contributing to annual economic growth for the first time since 2006. Based on these statements, most analysts have concluded the Federal Reserve is prepared to start reeling in the billions in stimulus and support programs it has extended to support the housing credit markets.
The Fed must decide whether the recent improvement in the jobs picture, along a slight firming of the credit market, is enough to end its purchases of mortgage-backed securities. Complicating this calculus is the expiration of the federal homebuyer tax credit in April.
From indications, home sales will rise approximately 6 percent this year. Based on these numbers, the housing rebound could account for 0.25 percent of the projected 3.6 percent overall growth in the economy.
Policymakers like Bernanke are betting housing prices finally have found a bottom. An advancing market would also allay concerns at the Fed that sales will relapse after the tax credit expires. While no one believes that the FOMC will adjust interest rates at its upcoming meeting, improvements in this sector give the Fed a freer rein to ultimately raise the interest rate for overnight loans among banks from near zero in an early attempt to stay ahead of the inflationary curve.
Rising values in the shares of publicly-traded homebuilders seem to reflect this growing optimism.
Forecast Remains Clouded
As an aggregate, homebuilding stocks have climbed 14 percent since the beginning of the year. Leading the rise in homebuilding stocks has been Columbus, Ohio-based M/I Homes Inc., with a 41 percent jump. Irvine-based homebuilder Standard Pacific Corp has seen a 31 percent rise it its issue with Miami-based Lennar Corp. seeing a 28 increase its share prices.
Despite the steady upswing in homebuilding stocks, the data is still mixed. According to figures released by the National Realtors’ Assn., sales of existing homes fell 7.2 percent in January, while housing starts rose only 2.8 percent.
Thanks to an improvement in weather and government hiring, the economy could add as many as 300,000 jobs in March. This should offset the drop of 36,000 in February payrolls that most analysts believe was caused by the unrelenting snowstorms that inundated the east.
Statistically, the figures are favoring the steady retreat from the Fed’s various stimulus programs.
Forecasters are projecting that mortgage originations for the purchase of a home will rise to $745 billion this year and $822 billion next year, the highest since 2008.
Declining home prices and continued low mortgage rates also have made homes more affordable. Figures released by the Realtors’ association for January, show that median home prices fell to $164,700, matching the lowest level since May 2002. According to data published by home lender Freddie Mac, the average rate for a 30-year fixed mortgage was 4.95 percent last week, up from a record-low 4.71 percent in December.
Along with its figures regarding affordability and mortgage rates, the Realtors’ also reported on the rising ability to purchase a home. Their report showed that the average household had 177.8 percent of the income needed to purchase a property in January, the highest since a record 184 percent in April 2009, when mortgage rates tumbled to 4.78 percent.
While the underlying trends may be improving, it still is not clear how soon the Fed will pull back from its stimulus. The question is whether the reconstituted housing market is built of straw, twigs or brick.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
