PERSON OF THE WEEK: On April 30, the federal home buyer tax credit program expired. Many people credited the program with spurring home sales during the recession, but a new question has emerged: What happens to the housing markets now that the program is over?
This week, MortgageOrb speaks with John Walsh, president of Total Mortgage Services in Milford, Conn., about the tax credit program's impact and how the housing market will respond without the program.
Q: How would you categorize the overall impact of the home buyer tax credit on the U.S. housing market?
Walsh: On the whole, the tax credit had a very positive effect on the housing market. It was a key factor, along with both mortgage rates and housing affordability being near record lows, that helped stabilize the housing market at a time when support was needed. Over the last few months, our company experienced a sharp increase in purchase loans that we attribute primarily to the tax credits.
The tax credits most likely softened the price decline in many markets, as it mobilized potential home buyers to take advantage of the lower home values. In absence of the stimulus, I don't believe many home buyers would have returned to the market with the sense of urgency we have seen.
Additionally, the tax credits had some positive trickle-down economic impact that cannot be measured in homes-sales figures. Many new homeowners tend to buy new furnishings, appliances, or goods for renovations. In this way, the tax credits also helped further stimulate the overall economy.
Q: Do you believe that it was a mistake to allow the tax credit to expire, or is the housing market ready to go forward without it?
Walsh: Only time will tell whether the credits should have been allowed to expire. The credits had already been offered twice, and any time the government subsidizes a program for too long, there is a possibility to create market inefficiencies. At some point, the housing market needs to stand on its own, and artificially supporting the market for too long may simply prolong the recovery process.
Additionally, the economy appears to be stabilizing, and I believe we are in the midst of a home-buying opportunity unlikely to be duplicated for many years. Declining housing prices, record inventories and very favorable mortgage rates have opened the door for qualified home buyers throughout the U.S. to purchase an affordable home.
Q: You are on record as stating that market conditions and Federal Reserve actions will likely cause mortgage rates to move higher within the next eight to 12 months. Is this good or bad for the housing markets?
Walsh: I think we will see short-term volatility in mortgage rates, but in the long run, they will likely increase. Increased borrowing costs are not beneficial to any market participants – buyers, sellers, or lenders – because it reduces both the purchasing power of buyers and the pool of potential buyers for someone trying to sell a home. As a result, if there is less transactional activity, it will harm lenders.
Q: Will the surplus of inventory continue to keep housing prices down, or are you beginning to see the excess inventory decrease?
Walsh: This is a difficult question to answer, because nobody really knows the extent of the potential shadow inventory out there or how many houses are in danger of foreclosure. Loan modification efforts have temporarily modified many mortgages, but many of these mortgages could go back into default.
There is some evidence that foreclosure activity is stabilizing, and while foreclosures have increased, the number of houses going into the foreclosure process appears to be declining. This may indicate that lenders are working through the backlog of foreclosures and that the trend will be slowly moving forward. But there are many factors that could impact this trend.
However, what I can say with some certainty is if we experience an increase in the number of distressed properties hitting the market, housing prices will resume declining. This assumes interest rates and other market factors remain the same.
Q: Assuming that the housing markets remain weak or worsen, do you believe that a new home buyer tax credit will be reintroduced?
Walsh: Nothing would surprise me at this point. We will have to wait and see what the after-effects of this last round of tax credits will be. Although the credit expired, purchasers who signed a contract prior to April 30 have until June 30 to close on their property, so I believe we will continue to see improvements in home sales through the end of June.
It may be necessary to reinstitute the tax credits if home sales drastically decline. This most likely won't happen at until fall 2010, at the earliest.
It is also worth noting that this is a mid-term election year, and one-third of the Senate seats and all of the House of Representatives are up for reelection. If the economy doesn't improve or gets worse, we could see many incumbent politicians usher through new tax credit legislation.