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Housing Recovery: To Remain a no Show in 2010

May 12th, 2010 Michael McDonough

Now that the extended first time home buyer credit is history, so is whatever impact it once had on home sales.  The good news is that data indicates the extended program had only a modest impact, especially compared to the original incentive; this however is also the bad news.  A recent, albeit modest, jump in home sales in the program’s 11th hour implies some interest in the program, but at levels only a fraction of the original credit’s impact leading up to its ‘would-be’ expiration in November.  As the chart below illustrates, existing home sales rose from a SAAR of 5.10mn units in August to 6.49mn by the would-be expiration in November, after which sales fell off a cliff.  While sales recovered modestly from February’s recent low of 5.01mn units, the lack of any significant impact is clear.  A spike in March’s pending home sales should help support home sales for at least another month, but beyond that sales will likely remain tepid, despite near record affordability.

Source: Bloomberg

Looking at a more ‘real-time’ housing indicator, MBA purchase applications (released this morning) rose marginally leading up to the expiration of the extended tax credit, but have since begun to recede.  Notice the flatness of purchase applications between November 2009 and March 2010, highlighting the general lack of interest in the new program.

Source: Bloomberg (rebased)

The combined effects of lukewarm demand, and a massive supply of vacant homes in the market will likely continue to be a drag—or at least not add any growth—to residential investment (a GDP component) for the remainder of the year.  This will hamper the strength of the current recovery, which will have to rely heavily on inventory rebuilding and business spending.  Upside risks to this forecast exists if stronger than expected consumption leads to more significant hiring.  However, over the quarters ahead fiscal stimulus will turn fiscal drag stirring up headwinds growth will be forced to overcome.

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