The U.S. housing market entered the icy waters of 2009 on a steep downward trajectory, carrying momentum gathered during a three-year contraction that deepened as well as broadened geographically over time. Furthermore, housing has plunged into the depths of the most serious economic recession since the early 1980s, making it doubly difficult for housingand the economy to get back above water.
Recent readings on home buyer demand are profoundly weak, and the serious supply-demand imbalances in single-family and condo markets continue to put strong downward pressure on house prices in many places. Thus, the highly destructive feedback loop still is plaguing housing markets as weakening demand drives prices down, weakens mortgage credit quality, and provokes even tighter mortgage lending standards. Unfettered, this process can easily overshoot equilibrium conditions and cause a lot of unnecessary damage to housing and the economy.
This situation cries out for an immediate and aggressive public policy response. Unfortunately, the first-time home buyer tax credit enacted last year has turned out to be highly ineffective and the Federal Reserve has just run out of traditional monetary policy ammunition. New fiscal measures to stimulate housing demand now are urgently needed, along with government efforts to limit foreclosures. The Fix Housing First Coalition, spearheaded by the NAHB, currently is supporting such a package in negotiations with Congress and the new administration.
The NAHB’s single-family Housing Market Index (HMI) hit a record low in December, and builders’ sales expectations for the next six months also fell to a record low at that time—despite substantial declines in prime home mortgage rates after Thanksgiving. Preliminary tabulations for January suggest further erosion.
Consumer confidence naturally has taken it on the chin as the economic recession has deepened. The Conference Board Consumer Confidence Index fell to a record low in December, largely due to consumer perceptions about the labor market, and there was further erosion in the proportion of consumers who plan to buy new or existing homes within the following six months. Those readings now are down to the lowest levels since the early 1980s.
The Federal Reserve ordinarily can exercise substantial control over the interest-sensitive housing sector. But the Fed ran out of traditional monetary policy ammunition when it effectively dropped the federal funds rate to zero on Dec. 16. Our central bank now will have to rely on nontraditional policy measures, generally involving use of the Fed’s balance sheet, and it’s difficult to say how well the Fed will be able to exercise control over housing and the economy through that route.
Conventional mortgage rates shifted down in the wake of the Fed’s late-November announcement of intent to buy (and hold) large quantities of agency debt and mortgage-backed securities; and on Dec. 16, the Fed suggested that it may move further down that road as conditions warrant. The Treasury Department may also buy into these securities markets to help reduce mortgage rates, using some of the Troubled Asset Relief Program funding for this purpose.
The NAHB estimates that Fed and Treasury actions will get prime fixed-rate conventional conforming home mortgage rates down to about 4.5 percent in short order. But that’s not far below current levels, and a federally financed mortgage rate buydown program may be needed to help kick-start home buying in the weak economic environment we’re now navigating.
Home-Buyer Tax Credit
The NAHB’s December survey of single-family builders confirmed the stunning lack of success of the refundable but repayable $7,500 tax credit for first-time home buyers that was enacted last summer. For this instrument to be a strong driver of housing demand, the size of the credit must be expanded, the repayment requirement must be dropped, and the credit must be made available to all buyers of primary residences.