The Housing Chronicles Blog: Housing market to worsen without bailout plan

Monday, September 29, 2008

Housing market to worsen without bailout plan

So what happens if there is no consensus on a plan to unfreeze the credit markets? For starters, a frozen real estate market. From an AP story:

The recession in the U.S. housing market is expected to be deeper, longer and scarier if lawmakers continue to be deadlocked in their effort to pass a $700 billion bailout of the financial industry...

U.S. home prices have already fallen about 20 percent since their peak in early 2006 and are expected to sink another 10 percent over the next year, according to Mark Zandi, chief economist with Moody's New data for July out Tuesday from the Standard & Poor's/Case-Shiller home price index will likely show more price declines in cities coast to coast.

Without a broad government response to the credit crisis, the economy, which many believe to be in recession or near it, would certainly worsen, analysts say. Unemployment, currently at a five-year high of 6.1 percent, could rise to double-digit levels as credit dries up.

"Businesses are going to begin shuttering operations and laying off workers," Zandi said. "That will hammer all consumer spending and housing demand."

Existing home sales were down almost 11 percent in August, compared with a year ago, while new home sales tumbled almost 35 percent. There's more than a 10-month supply of homes on the market.

Making matters worse, many potential homebuyers are having a hard time qualifying for a mortgage. Lenders, burned by record defaults and foreclosures, are only giving loans to borrowers with the best credit.

One silver lining, however, is that falling home prices have made homes more affordable for working families. And nervous investors helped push down the average rate on a 30-year, fixed rate mortgage to 6.12 percent on Monday, down from 6.22 percent on Friday, according to financial publisher HSH Associates.

But plunging stock markets and epic bank failures are bound to have a negative impact on home shoppers' psychology...

The credit crunch has crippled many homebuilders' ability to stay in business, and the industry has been among those calling on lawmakers to pass the financial rescue measure.

Most of the large, public homebuilders have been hoarding cash and aren't facing funding problems. But many smaller, private builders have seen their access to credit choked off, leaving the fate of building projects in limbo, said Nishu Sood, a Deutsche Bank analyst.

Private companies are "in a terrible condition right now," Sood said. Their ability to conduct business has been "effectively shut off."

Builders have lobbied in favor of the bailout in hopes it will ease the sector's access to financing and lift worries about the economy.

Industry groups said the House's failure to pass the bill Monday was a grave mistake, and the action shocked Wall Street, sending the Dow Jones industrial average down 777 points. House lawmakers were planning to reconvene Thursday to try again instead of adjourning for the year as planned...

Still, many Americans were baffled by the need to bail out Wall Street banks. And consumer groups -- which long warned about reckless lending practices -- were irate about the bailout, saying it didn't do enough to stop foreclosures and rewarded the institutions that fueled the boom in risky lending practices.

"The financial institutions that got us into this crisis are asking to be bailed out," said Michael Calhoun, president of the Durham N.C.-based Center for Responsible Lending, who called the government's actions a "textbook case of how not to manage a crisis."

Plus, consumer advocates said, if the Bush administration had been more aggressive last year in requiring loan modifications for homeowners in default, the crisis could have far less severe.

What? You mean to say the voluntary plan to initiate work-outs with borrowers didn't work? Well, when was the last time any business did anything voluntarily that wasn't in its own short-term interest. 1400?

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