Inventory, End of Incentives Cast Shadow

After taking a few steps forward in home price performance, seasonal factors and the negative effect of distressed properties brought the housing market one step back into a softer-than-expected recovery path.

"Those predicting a 'W'-shaped recovery in housing seem to be having their forecast play out, with several months of deterioration of a housing market that looked like it was on the road to stabilization last year," says Jonathan Dienhart, an analyst with Hanley Wood Market Intelligence report.

"While the extended federal tax credit for home purchases may drive some additional sales activity in March and April before it expires, so far anecdotal evidence from homebuilders on March home sales has not been particularly good."

Housing data will likely remain strong in April but once the tax credit expires, "it may be a struggle for housing activity to head higher from here as the year goes on," he said.

HWMI analysts see some potential in measures designed to compensate the loss of that effect.

Ways the market can eventually support itself include state-level tax credits that have already been implemented or are being introduced to support specific housing markets until the job market improves.

For example, the state of California has rolled out a new tax credit program for the year, but according to Dienhart, if these incentive programs fail to generate an increase in purchase activity, "the housing market may be in for yet another rough year."

The First American CoreLogic Loan Performance Home Price Index, which includes distressed sales data through February 2010, shows the first annual increase in over three years at 0.3%.

However, due to the shadow inventory and expiration of federal tax credits for first-time buyers, the housing market may only see "a sluggish recovery."

"February's year-over-year increase in the HPI breaks through an important psychological barrier," says First American CoreLogic chief economist, Mark Fleming, who finds the increase in the HPI encouraging, but not enough to indicate an optimistic forecast for 2010. "Prices will continue to bounce along the bottom while inventory levels remain elevated."

Year-over-year prices increased in February by 0.6%. The First American national single-family index is projected to decline by 3.4% from February 2010 to February 2011, "assuming the expiration of current federal tax incentives."

First American data show that together, these tax incentives, along with federal foreclosure prevention and MBS purchases, have helped stabilize home sales and home prices.

A more detailed report, "Stimulation: Measuring the Effect of the Housing Stimulus Programs on Future House Prices," that calculates price changes shows that if the federal stimulus is extended beyond April 2010, there will be an increase of 4.1%, compared to a 4.2% decline.

Distressed sales are another major factor that creates a downward pressure on prices. If these transactions are excluded the national HPI is projected to increase 4.9% year-to-year.

A recent report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision showed the percentage of mortgages that remain current fell for the seventh consecutive quarter at the end of 2009 caused by a 21.1% jump in mortgages that were 90 days or more past due. And it is still early to know whether new government programs introduced to stem defaults and help those "underwater" will succeed.

Other data indicate that seasonal factors and federal incentives, combined with fluctuations in home prices, have affected sales. HWMI reports that following six straight months of declines in existing home inventory from August 2009 to January 2010, the supply of existing homes has now recorded gains in the past two months increasing by 1.5% in March compared to February, to 3,584,000 units.

This is the highest level of existing home inventory on the market since September 2009, most likely because sellers rushed to put their homes on the market before the expiration of the federal homebuyer tax credit at the end of April.

HWHI finds both new and existing home sales picked up significantly in March as warmer weather and buyers shopping before the federal homebuyer tax credit expired resulted in surges of 6.8% in existing home sales and 26.9% in new home sales recording the strongest monthly gain since 1963.

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