Business


October sales gains lift hopes for housing market

MONDAY, NOV. 23, 2009, 11:01 A.M.

WASHINGTON — First-time buyers seized on an expiring tax credit, low mortgage rates and falling prices to boost home sales in October to their highest level in 2 1/2 years.

Home sales are now nearly 37 percent above their bottom in January, though still 16 percent below their peak in 2005. At the current sales pace, there’s a modest seven-month supply for sale. Bidding wars are occurring in some areas.

The report Monday from the National Association of Realtors pleased investors on Wall Street. And analysts said the homebuyer tax credit, which has been extended, will help sustain the housing market next year.

Yet the overall economy is likely to benefit only slightly from higher home sales. Too many factors are weighing on the fledgling recovery.

Home construction is weak. Foreclosures are rising. Job creation is slow. And consumers remain reluctant to spend.

The Realtors group said resales rose 10.1 percent to a seasonally adjusted annual rate of 6.1 million in October, from a downwardly revised pace of 5.54 million in September. It was the biggest monthly increase in a decade, and far above the 5.65 million pace economists expected, according to Thomson Reuters.

Investors seized on the better-than-expected home sales, along with a falling dollar, to snap up stocks. The Dow Jones industrial average and other stock indexes rose more than 1 percent in early afternoon trading.

The strength in home sales helped ease the market’s pessimism that followed weaker data on housing starts, employment and consumer confidence over the past few weeks. The falling dollar contributed to the rally, on the expectation that a low dollar will keep interest rates low. Low rates make it cheaper for companies to borrow and investors to finance purchases of stocks and commodities.

Stocks also were helped by momentum buying, with investors buying stocks simply because the market is rising and no one wants to miss out on the rally.

The recovery in the housing market is being driven by reduced prices, combined with federal programs to lower mortgage rates and bring more buyers into the market are driving the housing market recovery. The median sales price was $173,100. That’s down 7 percent from a year earlier and off roughly 2 percent from September.

Many experts predict prices will hit a new low next spring, perhaps falling another 5 to 10 percent, as more foreclosures get pushed onto the market. The government has tried to counter that trend by offering a tax incentive for first-time buyers and by keeping mortgage rates around 5 percent since the spring.

The tax credit of up to $8,000 for first-time owners was originally set to run out on Nov. 30. But Congress renewed it earlier this month and broadened its reach. People who have owned their current homes for at least five years can now claim a tax credit of up to $6,500 for a home purchase. To qualify, buyers must sign a purchase agreement by April 30.

The Realtors’ report on October home sales reflects offers made before buyers knew the tax credit would be extended. Home sales are likely to drop over the winter as buyers hibernate for a few months without the looming tax credit deadline.

The new deadline means “we’re going to see some good activity coming out of the spring,” said Pat Lashinsky, chief executive of online real estate brokerage ZipRealty Inc.

But the government support can’t last forever. The Federal Reserve is likely to curtail its efforts to push down mortgage rates next year. If rates then rise too high, it would make home purchases less affordable and dampen demand.

“When we do kick those crutches out from under the housing market, will it be able to stand on its own?” said Mark Fleming, chief economist with real estate information company First American CoreLogic. “It’s really hard to tell.”

Economists also cautioned that consumer spending and job creation remain too weak for the overall economy to mount a strong recovery.

“The increase in home sales will provide a welcome boost to housing-related consumption and employment although, unfortunately, not by enough to prevent a prolonged period of sluggish consumer spending and labor market weakness,” Paul Dales of Capital Economics wrote in a research note.

The government said last week that construction of new U.S. homes plunged in October because of uncertainty over whether the homebuyer tax credit would be extended. The extension, and expansion of the credit, eased those fears. But it also showed how much the housing market — along with the broader economy — has relied on government support for its fledgling recovery.

Another disquieting note last week was a report from the Mortgage Bankers Association that a rising proportion of fixed-rate home loans made to people with good credit were sinking into foreclosure. It also found that 14 percent of homeowners with a mortgage were either behind on payments or in foreclosure at the end of September. It was a record-high figure for the ninth straight quarter.

Yet for homebuyers with cash and access to credit, falling prices and low mortgage rates have proved irresistible.

Joey Wilson, 53, and her husband made unsuccessful offers on 20 Las Vegas homes since midsummer before closing on a four-bedroom, $136,000 home this month.

“It’s insane,” said Wilson, who relocated from Kentucky. “I’ve never seen a market like this before.”



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