Two recent federal policy initiatives are now provid-­ing support to home buying and figure to help stem the ­extended decline in home sales before long.

The first punch from Washington was the temporary $7,500 tax credit for first-time home buyers, contained in the Housing and Economic Recovery Act that was signed into law on July 30. The second was the dramatic federal takeover of the secondary-market government- sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, on Sept. 7. The first ­initiative provides incentives for home ­buying over the balance of this year and the first half of 2009, while the second increases the availability and lowers the cost of credit in the huge conforming mortgage market served by the GSEs. Home Buyer Tax Credit

The new home buyer tax credit is refundable (the Treasury will send qualifying buyers checks if their income tax liability is less than $7,500), but it also has to be paid back to the Treasury over a 15-year period—­making it function like an ­interest-free loan from the Treasury. Even so, the value of the credit certainly is substantial, and there are ways for prospective qualifying buyers to access the credit prior to filing their federal tax returns in 2009. (For details on the tax credit, visit

In early September, the NAHB surveyed more than 400 single-family builders to monitor awareness of the home buyer tax credit and to get some early indications of the likely impact of the tax credit on new-home sales. We found that virtually all builders (98 percent) were aware of the Housing and Economic Recovery Act and the tax credit program, and 54 percent of survey ­respondents were involved in the first-time buyer market to at least some degree.

Roughly half of all respondents figured that the tax credit would have at least some positive impact on home sales in their market areas, while one-quarter expected no positive impact and the rest were unable to form an opinion at the time of the survey.

The tax credit was enacted at a very good time. Surveys of consumer sentiment have been showing rising proportions of households saying it’s a good time to buy homes, primarily because of lower house prices in many areas. The tax credit could just be the match that ignites this dry tinder.

GSE Takeover

A large majority of respondents to our early-September survey said that higher mortgage rates and tighter lending standards had seriously weakened their home sales during the previous month. In this regard, it’s apparent that tightening of underwriting requirements and imposition of higher guarantee and mortgage delivery fees by the beleaguered GSEs were largely responsible for those developments.

The federal takeover of Fannie Mae and Freddie Mac heavily favors GSE debt as well as guaranteed mortgage-backed securities, and prices of both types of investments surged in the aftermath of the Sept. 7 announcement of the takeover plan. Those effects quickly put downward pressure on conforming mortgage rates, and the takeover plan also assures that the availability of credit in this huge portion of the home mortgage market will be well maintained for some time. We may even see rollbacks of tighter underwriting requirements and various fees that had been hiked by the GSEs as their financial conditions deteriorated.

The long-term implications of the GSE takeover for the housing finance system have yet to be determined, and the next Congress and administration will have to decide on the structure and functions of the GSEs down the line. But the immediate implications for mortgage markets definitely are positive, and those effects should endure at least through 2009.

Messages for Builders

The recent federal policy initiatives are complementary, and the combination will help support housing demand in the near term. But there’s still a heavy supply of ­vacant homes for sale and the foreclosure wave has not yet crested. Builders must carefully assess the supply-demand balance in local markets and be sure their buyers are pre-approved for credit before picking up the pace of production.

David F. Seiders
Chief Economist
Washington, D.C.

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