What Happens After the Stimulus Ends? (The national picture)
Low mortgage rates and incentives for first-time homebuyers helped arrest the long slide in home sales, housing starts, and home prices during 2009. Sales of both new and existing homes perked up toward the end of last year and house prices, as measured by the three most popular indices, stabilized during the second half of the year. New home construction also picked up modestly, and a number of homebuilders actually returned to profitability, again with the help of tax refunds from operating-loss carry backs. Foreclosure activity remains high, but lenders, at the urging of government regulators, are making extraordinary efforts to reduce foreclosures and are also showing restraint in unloading foreclosed homes into the already bloated resale market. With so much of the recovery tied to some sort of stimulus, and much of that stimulus set to end in the coming months, the natural question is what happens to the housing market after the stimulus ends?
Home sales and new home construction will recover less rapidly than the pace for which many would hope. We see new home sales rising close to 20 percent on an annual average basis and look for existing home purchases to climb 9 percent. While those increases sound impressive, much of the improvement has already taken place as 2009 ended on such a strong note. Sales likely got off to a slow start in 2010 because of unusually harsh weather in January and February, which are two of the seasonally weakest months of the year. Demand should pick up in March and April as new home sales, which are recorded at the time a contract is signed, would need to be booked by the end of April in order to close on new homes by June 30. Existing home sales, which are recorded at closing, will likely ramp up in May and June. Our expectation is that home sales and new construction will gradually grind higher, reflecting a modest improvement in employment conditions, record-high housing affordability and a slight relaxation in lending requirements in parts of the country.