Can the housing market stand on its own?

Exterior of brick home with arched entryway After April, the housing market will be largely on its own. The Federal Reserve’s $1.25 trillion program of buying up mortgage-backed securities ends this month and the $8,000 homebuyer tax credit ends in April. The Obama administration’s emergency money program to provide debt relief for up to 4 million households by restructuring distressed mortgages has produced only 170,000 permanent modifications.

Job losses continue to create loan defaults, foreclosure sales are still driving property prices downward, and mortgage interest rates are expected to rise. These things do not bode well for a turn-around of the housing market, and with budget deficits dominating the political scene, further government interventions in the housing market are unlikely.

Things looked rosy for awhile

Last fall, things were looking up in the housing market. The homebuyer tax credit helped to increase sales and stabilize prices, while the purchase of mortgage-backed securities helped to hold down mortgage interest rates. New home construction gained some momentum, generating hope for the creation of jobs. The magic, however, was fleeting.

Sales are down and inventories are up

For three months in a row now, new and existing home sales have fallen. Inventories have increased as a result, and the Federal Housing Finance Agency reported national declines in home prices for December and January. Experts contend that lasting economic recovery is not possible without a healthy housing market. Concern is growing that the housing-market stabilization of 2009 was nothing more than a temporary result of government interventions which are about to end.

A second decline will have a ripple effect

A renewed decline of the housing market may not be inevitable, but fears of an aftershock are growing. If prices drop again, household wealth and construction employment are both likely to fall, mortgage default rates are likely to rise, and the broader economic recovery — which has so far been fragile at best — is likely to suffer.