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US throws lifeline to housing sector

Monday, July 28, 2008 [ ]

WASHINGTON: A US housing sector that has yet to hit bottom after its worst slump in decades secured a lifeline Saturday from a massive government aid package that is arriving none too soon, analysts say.

The aid package expected to be signed by President George W. Bush comes with the housing sector still weakening from a nearly two-year-old slide and data showing home prices falling further, inventories rising and many buyers waiting on the sidelines.

Some analysts say the market is frozen as a result of tight credit and buyers paralyzed by concerns that prices will continue to fall. Moreover, many homeowners are unable to sell their properties to “trade up” as they would under normal market conditions.

“As more homes are dumped on the market, home prices fall further, driving further mortgages underwater, leading to further foreclosures, further homes dumped on the market, and further home price declines,” said economist Richard Kelly at TD Bank.

The housing rescue plan “hopes to help stop the self-fulfilling prophesies of doom, gloom, and liquidity vacuum.”

US home foreclosures rose nearly 14 percent in the second quarter and were up 121 percent year-over-year, according to a survey by RealtyTrac.

New home sales in the US fell 0.6 percent in June and have tumbled 33.2 percent from June 2007, according to government data. Existing US home sales fell another 2.6 percent in June to a 10-year low and were down 15.5 percent from June 2007.

The glut of unsold existing homes at the end of June rose to an 11.1-month supply at the current sales pace, and median prices fell 6.1 percent, according to the National Association of Realtors.

NAR president Richard Gaylord said the association’s recent surveys showed “nearly a quarter of potential home buyers are waiting on the sidelines,” in the face of declining prices.

Investment manager Bill Gross of the Pacific Investment Management Company, LLC (Pimco) estimates the housing bill is likely to lower the cost of mortgage credit by adding liquidity and “is the best way to begin the long journey back to normalcy.”

Other analysts said the plan simply props up a system that fueled too much speculation.

Adolfo Laurenti, senior economist of Mesirow Financial, said that offers of the explicit government backing of mortgage giants Fannie Mae and Freddie Mac “would only exacerbate the market’s mispricing of risk.”

“That said, these are not normal times, and the consequences of letting these institutions fail are significantly greater than the moral hazard of bailing them out,” Laurenti said.

Gary Thayer, senior economist at Wachovia Securities, said the bill could send a bad signal about speculation “but that can be addressed later when we are not in a severe problem.”

Currently, the crisis demands some moves to help stability, Thayer said: “We’re all in this problem together.”

The rescue plan provides some 3.9 billion dollars to help local governments buy and rehabilitate foreclosed homes.

It also allows the Federal Housing Administration to insure an additional $300 billion in loans and provides for government credit and equity injections in Fannie and Freddie.

“This is a step in the right direction, it will help limit the foreclosures that are likely to hit the market over the next few years,” said economist Michelle Meyer at Lehman Brothers.

“Hopefully the tax incentives will stimulate new demand,” she added.

Others argue the moves will prevent a market correction and involve the government more in the housing market.

Joseph Brusuelas, chief economist at Merk Mutual Funds, said the government should dissolve Freddie and Fannie to end the distortions in the market that led to the boom-and-bust cycle.

“The solution to the current financial crises and its legislative response requires that no firm or enterprise ever again be permitted to obtain an implicit guarantee of federal largesse,” he said.

“If the rescue of the government-sponsored enterprises are not handled properly the US taxpayer will find themselves on the hook for trillions of dollars of liabilities.”


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