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Nationwide housing prices have risen for six consecutive months. Plenty of people are now asking whether we can finally move on from this three-year housing assault.
Maybe. Hopefully. But as we limp toward economic recovery, nothing depends more on stimulus for its survival than housing. More importantly, much of housing's life support will have its plug pulled in the coming weeks and months.
Here's a look at three of the biggest housing programs, and what their absence could mean for the market.
1. Foreclosure preventions
As of December, more than 900,000 homeowners had trial mortgage modifications through the government-backed foreclosure prevention program, auditioning for another shot at housing survival. Nearly half of these trial modifications have been issued since September -- we're just ramping up, baby!
Unfortunately, most won't be made permanent (for several reasons). By JPMorgan Chase's (NYSE: JPM ) early metrics, more than 80% of trial modifications appear destined to fail. So the trial modification process -- typically three to five months long -- often just delays the inevitable foreclosure. This is especially true because the people in the trial program are prime default risks to begin with. The faster trial modifications are ramped up, the farther the can gets kicked down the road.
2. First-time homebuyer credit
Paying people to buy stuff is a clever way to spur demand. Since 2008, as many as 2 million happy homebuyers have been enticed toward ownership by a tax credit of as much as $8,000. Although the National Association of Realtors estimates that only about 18% of these sales would not have occurred without the credit, that's still several hundred thousand extra sales.
But the free money ends April 30. Before then, there's a rush to buy now. And we know how that story ends: Just as the Cash for Clunkers program puffed up GM and Ford (NYSE: F ) last August, tax-credit-driven sales often come at the expense of future sales. That can lead to a grade-A hangover after the credit is removed; September auto sales fell 40% compared with August.
A similar effect could take place in housing. As homebuilder D.R. Horton (NYSE: DHI ) recently noted, "We expect [later this year] will be the most challenging as the tax credit support for home sales will have expired." In business parlance, "challenging" usually means "tearful."
3. Federal Reserve buying mortgage-backed securities
In late 2008, the Federal Reserve launched a plan to purchase $1.25 trillion worth of mortgage-backed securities issued by Fannie Mae (NYSE: FNM ) and Freddie Mac. Through last week, it had purchased $1.18 trillion, and it aims to wrap up the campaign by March.
The Fed's done all this to keep mortgage rates low. Once it stops buying, rates will surely pop. No one knows by exactly how much, but consider this: The value of the entire mortgage-backed securities world (including private-label securities) is $9.2 trillion. A $1.25 trillion purchase over 18 months has represented a tremendous chunk of the overall mortgage market.
The road ahead
I'm not one to blanketly label all federal stimulus as fruitless and ruinous. But a lot of what's been thrown at the housing market over the past two years has been particularly flubbed. Temporary measures targeted at the wrong problems will likely mean that much of the stimulus here was for naught.
There's one effort that could really make a difference in the housing market: cutting borrowers' mortgage principal, to dissuade underwater homeowners from abandoning ship and walking away.
Judging by your reaction to my colleague Matt Koppenheffer's recent article, most of you equate walking away with cheating on your spouse. On your wedding night. With their sibling. But like it or not, a sizable amount of foreclosures -- about 25%, by one study -- involve homeowners who hit the road only because their home is worth less than the mortgage. Closing that gap and "re-equitizing" homeowners is one of the truest ways you can effectively and permanently stop prices from blowing up.
Yet no one will dare try it. Why? For one, it's a little late now. Whatever political and fiscal ammunition we had has already been spent on blatantly less effective housing-stimulus programs. Any principal reduction plan would mean sending more obnoxiously large checks from taxpayers to banks. For good reason, no one wants to give more money to Goldman Sachs (NYSE: GS ) , Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) . Plus, there'd be so much protest that some banks probably wouldn't take the money, even if it were offered.
Better luck next time. And at this rate, there might be a next time.