Financing incentives begin to wind down

As the housing market has begun to show signs of a pulse, banks and federal agencies are looking at taking the patient out of ICU. What's uncertain at this stage is how the market will react without the supports that were used to stabilize it.

First up is the first-time buyer's tax credit slated to end as of Nov. 30th. All evidence suggests this program has been significant in prompting sales at the lower end of the market. In the Cincinnati area, homes below $150,000 were a majority of sales in August while those above that price continue to languish (with an average of 68 days on market vs. 82 days, not accounting for listings that were renewed after expiration).

There is a fair amount of lobbying to extend the credit, but no indications that will happen. It's not unlikely that Congress will wait to see whether there is a significant adverse impact before any additional extension.

The second significant event is the winding down of the Federal Reserve's purchase of mortgage-backed securities. Earlier this year, the Fed initiated a $1.25 Trillion (yes, that's a T) purchase of the securities in an effort to lower mortgage rates. Again, all the evidence points to this being successful as mortgage rates have been at historic lows for the better part of the year.

At the Fed meeting that ended last week (9/23), it was announced the program would be extended through the first quarter of 2010, but no additional funds would be provided. In effect, the Fed stated they were aiming for a "smooth transition" to normal market operation. Economists expect that mortgage rates may increase by up to 1/2 a percentage point when this program ends.

While not an official incentive effort, the Federal Housing Administration also announced that it will implement several steps that effectively tighten its lending standards due to an increasing level of delinquencies. FHA loans have been an outsized portion of loans in the past year as it has become the financing of choice for low equity mortgages.

There are still a number of incentive programs that remain in effect. However, for many who are suffering from "bailout fatigue," the movement towards ending these programs has been welcome news. On the other hand, many homeowners as well as real estate and related professionals are concerned that sales and prices will once again begin to fall. High inventory rates and new foreclosures will continue to weigh on the market, but the therapy to get the market standing on its own feet may have just begun.