The number of pending sales of existing homes in the US rose in February, giving the real estate market an optimistic outlook for the coming year.
Extended Homebuyer Tax Credit
Much of this recent increase in existing home sales has been attributed to the extended home buyer tax credit, which requires homebuyers to sign a sales contract by April 30th in order to be eligible. Pending sales on existing homes rose 8.2% according to the National Association of Realtors (NAR) Index, which now sits at 97.6, far above where economists thought February home sales numbers would be, with some actually predicting a decline of 0.5%.
There have been all sorts of so called green shoots in housing for months. Prices have steadied. Sales have increased at least slightly. Yet, none of it matters.
All that matters is what will happen over the next four to six months. That's because housing has been carried by two important stimuli and each has gone away or is about to go away. What will be critical is what will happen to the market once both go away.
The biggest stimuli was the Fed's quantitative easing that bought in excess of one trillion dollars of mortgage bonds. That's kept the thirty year mortgage at and below 5%. That ended on the first of April and now we'll see just how high mortgage rates will go without it. The market was barely motoring along while interest rates were at record levels. What will happen when rates go up? What if they only go up 1%. That's about $200 extra dollars a month in mortgage payments on a $200,000 mortgage.
Second, the first time home buyer credit incentive is about to expire at the end of the month. That gave first time homebuyers $8000 which could be applied directly to the down payment. That's no small amount. In fact, that largely drove the health March home sales numbers. So, what will happen to housing once these two go away?
In fact, it's scary to think just how weak the housing market has been considering the enormous stimulus that's been driven into the market. In fact, we've had near record low mortgage rates for more than a year and still the housing market has done little to recover. For almost nine months, first time home buyers were given an enormous credit and still the housing market was still not moving. So, we'll see where housing will go now that both will go away.