Home Buyers Get a Reprieve

Home Buyers Get a Reprieve

Home Buyers Get a Reprieve
By Sudeep Reddy and James R. Hagerty
The Wall Street Journal
September 24, 2009

The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities.

The Fed's action signals its belief that the economy, while in recovery, remains fragile and that housing, which has seen some improvement in recent months, has only started to pull out of its slump.

"We definitely need help from the government," says Lee Barrett, president of Century 21 Barrett, a real-estate brokerage firm in Las Vegas. "I don't think the market can make it on its own." He also hopes Congress will extend tax credits for home buyers due to expire at the end of November.

"Economic activity has picked up following its severe downturn," the Federal Open Market Committee said Wednesday in a statement after a two-day meeting. Though conditions in financial markets and the housing sector have improved, household spending "remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit," the Fed said.

Treasury bonds and mortgage-backed securities rose in price Wednesday, sending yields lower. Stocks slumped. Although the Dow Jones Industrial Average briefly moved above the 9900 level following the Fed's afternoon statement, making some investors think about a possible return to 10000, it sagged late in the day and finished down 81.32 points, or 0.83%, at 9748.55. It was the biggest one-day point and percentage decline since Sept. 1.

Mainly because of heavy government intervention in the mortgage market, interest rates remain near their lowest levels in decades. Rates on 30-year fixed-rate conforming mortgages currently average 5.24%, down from a recent peak of 5.81% in June but up from the year's low of 4.84% in late April, according to HSH Associates, in Pompton Plains, N.J.

Sales have increased in California, Florida and some other areas from the very depressed levels of a year ago, largely driven by investors and first-time home buyers chasing bargains on foreclosed properties. But the market remains weak amid worries that new waves of foreclosures will add to supply as banks sort through mountains of paperwork from distressed borrowers seeking easier loan terms. Not all of those borrowers can be saved.

That leaves an unknown number of foreclosed homes -- estimated by some analysts to total several million -- to likely hit the market over the next few years. The risk that those foreclosures will depress prices further may keep some potential buyers on the sidelines. "Nobody seems to know how big that overhang is," says Tom Lawler, a housing economist in Leesburg, Va.

Data on existing-home sales for August will be reported Thursday, and Mr. Lawler is bucking the consensus in predicting a decline. He notes tax credits induced many people to buy homes earlier this year, and sales may fall in the near term now that most of those tax-related purchases have been completed.

In one sign that the housing market hasn't fully recovered, luxury-home builder Toll Brothers Inc. this week announced a nationwide sale on new homes. The specials being offered by Toll include lower prices on options, including custom tile and appliances, and mortgages with initial rates as low as 2.875%.

With so many empty houses sitting on the market, some builders say they still have no way to make a profit with new construction. "Why build new when people can go out and buy for less than it cost?" says Mark Connal, vice president of realty at Michael Crews Development, a developer and builder in Escondido, Calif.

An early end to the Fed's purchase program "could potentially have reduced the demand for housing by 10% to 20% and that could have slowed the recovery," says Glenn Boyd, head of U.S. asset-backed securities research for Barclays Capital. "This is certainly a positive and adds to our confidence in the ultimate recovery for home prices."

The Fed is about two-thirds of the way through its mortgage-purchase program, which was launched late last year to support mortgage lending, housing activity and broader credit markets. The central bank's decision to complete the full $1.25 trillion in purchases of mortgage-backed securities -- rather than "up to" that amount, as it said in August -- ended speculation that it might stop short, as a handful of policymakers have suggested. The Fed still plans to buy up to $200 billion in debt issued by Fannie Mae and Freddie Mac.

Mortgage rates were expected to rise throughout the fall and winter as the Fed wound down its program to buy the mortgage-related securities. Even if they inch up, now they're less likely to increase as sharply, given the Fed's longer time horizon that stretches to March.

"The Fed wanted to exit with as little disruption as possible to the market," says Peter Hooper, chief economist at Deutsche Bank Securities. "Doubling the length of time you're going to make the purchases allows for a pretty smooth transition."


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