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What Happens When the Fed Exits the Market?

Coming 2nd Half of 2010?

The Fed is scheduled to exit the housing market this spring. The Home Buyer Tax Credit ends on April 30, 2010 (the date the house must be in contract). The Fed has already announced that their program purchasing mortgage-backed securities will expire on March 31, 2010. Most anticipate a quick and dramatic rise in interest rates at the conclusion of that program.

The question that faces the industry is whether housing demand has any hope of continuing after these programs expire. I think recent history is a good indicator.

The original end date of the Tax Credit was to be November 30, 2009 (the date you needed to close on your purchase to be eligible for the credit). Most experts did not believe the federal government would extend the credit (which it did). That meant that, as buyers were making a purchasing decision, they needed to buy a house that they could close on by November 30.

Reports coming out now show that when the original tax credit was set to expire there was a rush to purchase. After that original rush, demand faded rapidly.

Last month the U.S. Census Bureau’s ‘New Construction Report’ showed sales month-over-month had fallen by 11.3%. That report covered new home sales in the month of November. Buyers knew they would not be able to close on a new construction home before the original tax credit expired. Demand evaporated immediately.

The NAR’s Pending Home Sales report released earlier this month showed a 16% fall off in pending contracts. The report explained this decline by saying:

Contract activity for pending home sales fell after a surge of activity in preceding months to beat the original deadline for the first-time home buyer tax credit.

And yesterday, the NAR’s Existing Home Sales report showed a fall of 16.7% in sales. The explanation?

After a rising surge from September through November, existing-home sales fell as expected in December after first-time buyers rushed to complete sales before the original November deadline for the tax credit.

New construction sales, pending contracts and existing home sales all fell off dramatically after the tax credit was supposed to originally expire.

What does that say for demand after the tax credit actually expires on April 30? I think it is safe to assue that something very similar will happen.  And interest rates will probably be on the rise at the same time.

It is believed that The Fed will make an announcement on Wednesday in regard to the expiration of the program that has held rates down. Dean Hartman, our mortgage expert, will blog on this announcement here at the KCM blog on Thursday.

What does all this mean to you?

If you are buying, check back on Thursday. If the Fed does let the program mentioned above expire, buy now before rates jump up.

If you are selling, put the house on the market now while demand is still high. Below, is a graph from data taken from the S&P Case Shiller Futures Index on the Chicago Mercantile Exchange. The graph shows where they believe prices will be for the next several years.

As you can see, they believe that prices will remain strong for the first half of the year (while the Fed’s programs are still in effect) and then fall sharply until they hit bottom in the spring of next year. Prices will then start the long climb to recovery.

Hope this information helps you better understand your options.

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7 replies
  1. Michael Mekler
    Michael Mekler says:

    There is still the other side of the coin. In 2000-2006 we had no First time home, buyer credits or the Fed was not buying these levels of MBS’s and the market was HUMMING to the point that it over heated and pumped a TREMENDOUS amount of air into the bubble. As a mortgage professional, I can’t wait for these variables to go away and things to get back to normal. Yes we might see a month or two of stagnation but things will get back to normal. I think it will be a shame if Bernanke goes away simply because regardless of the curve balls that are thrown at him he is too big a scholar of the great depression to allow the system to fall apart.
    Just my 2 cents.

  2. M
    M says:

    Is there a chance the Feds would decide to extend the March 31st expiration of their program (purchasing mortgage-backed securities) to prevent low rates from rapidly increasing? …First, is this possible? Second, how long might they do it for? And third, will that just postone the drop in the market? My thoughts are… if the Fed SEPARATES THE TIMING of the Tax Credit Expiration from the cessation of the above mentioned program …that maybe the market drop would be smaller or perhaps stay steady before they start to rise again? (Note: the Tax Credit will stop during the Standard Peak in the Nat’l market, helping to soften that hit.) In other words, prevent the larger drop as per the Case Shiller Future’s Graph, and shorten the recovery time? Just a hopeful thought… M

    • Steve Harney
      Steve Harney says:

      Great points M! The Fed has said they will definitely exit the mortgage market on March 31st. They have hinted that they may come back in if mortgage rates rise to an unacceptable rate. What that means no one knows. They are purposely being vague.

      In regard to the Tax Credit, I believe it will end as scheduled. Some have guessed they might scale it down ($6,000 for 3 months, $4,000 for the next three months, $2,000 for the three months after that). Time will tell.

      Real estate professionals should move forward as though all assistance will end as scheduled and make a plan based on hard work and serving their buyers and sellers. That is the only thing they have ultimate control over.


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