Businessweek Archives

Is the Housing Recovery Real?


The U.S. government has been helping to prop up housing sales by keeping interest rates artificially low and by offering $8,000 to renters who purchase homes. A new report by Capital Economics in Toronto suggests that the government has succeeded in giving a needed boost to the market, but the recovery would likely continue with or without the incentives. (The deadline for first-time buyers to take advantage of the $8,000 tax credit is fast approaching. To get the credit, buyers must close by Nov. 30. The National Association of Realtors and the National Association of Home Builders, which say the housing market is doomed without the incentive, are lobbying Congress to extend the credit and expand it to include all buyers).

The “government’s initiatives have kick-started the housing market, but they do not explain all of the recovery,” Paul Dales, U.S. Economist at Capital Economics wrote in an Oct. 6 paper. “… the housing recovery is not going to come to a complete halt if the government incentives are not extended.”

According to Dales’ analysis, the $8,000 tax credit helped convince about 225,000 first-time buyers to make purchases they otherwise wouldn’t have. That’s about 30% of the increase in home sales since January. So, Dales concludes that the other 70% of increased number of home sales likely happened because home prices have fallen to more affordable levels and because interest rates are low.

“The pace of the recovery is likely to slow and it will be many years before either activity or prices climb back to their previous peaks,” Dales wrote.

Irvine, Calif.-based real estate consultant John Burns has a more pessimistic view. He wrote recently that without “government intervention, home prices will plummet, banks … will continue to lose money, and the economy has virtually no chance of increasing overall employment in 2010.”

Burns estimates that 6.94 million mortgages are already delinquent and many of those properties will go back on the market as deeply-discounted foreclosures or short-sales in 2010 and 2011. Others, including Dales, argue that lenders will be cautious about dumping foreclosures on the market because that would drive down prices quickly. It would be more prudent to dribble the listings out slowly.

But Burns says lenders will have so many distressed properties on their books that they will have to start selling sooner rather than later.

“While both the media and stock investors believe that housing has bottomed,” Burns wrote, “they are unaware of the massive supply of homes that are already in the foreclosure process that will certainly drive home prices down even further when they’re sold.”


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus