Wednesday, December 29, 2010
2010.....A Market Overview
The administration's announced goal of the modification program was to save 3-4 million families from losing their homes. The actual number of homeowners assisted will come in at less than one million. Most consider the program a failure.
However, we believe that there was a secondary unannounced goal of the modification program: to slow the flow of foreclosed homes to the market. Putting homes through the modification process prevented banks from moving forward with the repossession process as quickly as they normally would.
Limiting supply was one of the ways the administration used to help stabilize home prices. However, the administration has recently slowed the modification process. Going into 2011, a larger number of foreclosed properties will enter the market.
The administration began to control rates back in 2009 with the purchase of mortgage-backed-securities. When it was announced that the government would back off the purchases in the spring of 2010, everyone (including us) believed that mortgage rates would climb back to historic norms (6-7%) by the end of the year. The exact opposite took place. Rates fell to almost 4% on 30-year mortgages before jumping back to the 4.5 – 5% range at the end of the year.
The most amazing part was that the lower interest rates did not seem to spur buyer activity as sales softened while rates continued to fall through the year. Interest rates, at best, helped in maintaining demand in 2010.
Home Buyers' Tax Credit
Again, the administration's goal was to stabilize home values. The tax credit was supposed to drive housing demand. And it did – for the first four months of the year. However, it now appears that the tax credit did not increase overall demand, but instead, just pulled that demand forward.
By decreasing supply (mortgage modifications limited the number and impacted the speed of foreclosures entering the market) and increasing demand (lowering interest rates and issuing a tax credit), the administration tried to stabilize the housing market. They accomplished some of their goals in a limited way.
We will not see this magnitude of government intervention in 2011 however. What will that mean to housing next year? We will give our thoughts on that in tomorrow's blog.