CreditSights: Bearish on housing

September 21, 2009

Commentary from CreditSights today (no link):

As we have repeatedly commented over the past few weeks, we believe the current positive momentum in the housing sector (especially in the equity market) has been a product of government life support and cannot be sustained once government initiatives that were implemented to boost the sector come to an end.The recent improvement in home demand and prices has been the result of government¬†efforts to lower mortgage rates and provide tax credits for potential home buyers. The homebuyer tax credit expires on December 1 this year, while the Fed’s program of buying MBS–which have kept rates low and mortgage loans flowing–will eventually wind down. We are concerned that once this happens, the momentum of better sales could halt unless jobs are created and mortgage rates remain low….

My thought is that the tax credit will get extended. Politicians aren’t ready to grapple with the consequences of removing support for the housing market. A bigger question is what will happen when the Fed stops buying mortgage-backed securities. As Peter Eavis noted in the WSJ¬†last week:

Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged.

The Fed will probably allow its MBS purchase program–totally $1.25 trillion–to expire on schedule at the end of this year. But if the housing market resumes its downward spiral, Ben Bernanke will start up the printing press again…

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The housing crash casts a longer shadow than current policy seems to address. Check out this post on option ARMs which are likely to cause a new wave of foreclosures starting next year.

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