Get Ready for a Painful 'Hockey Stick' Housing Recovery

The looming expiration of two major federal programs — the home-buyer tax-credit initiative and the Federal Reserve's $1.25 trillion mortgage-securities-purchase program — likely won't wipe out the recovery currently under way in the battered housing sector, but it could stall it, experts say.

To prevent a worsening of the housing situation, the White House is expected to announce today a new set of programs to shore up the market, including one that will cut the amount owed on troubled mortgages. There is also expected to be an upward bump in the cash incentives to lenders who reduce mortgage principals as part of loan modification, as well as a requirement that lenders trim monthly mortgage payments for the newly unemployed for a period of several months.

While the new programs should assist the most troubled end of the real estate market, they will not come close to replacing the huge intervention by the Federal Reserve in the mortgage-securities market, which helped keep mortgage rates enticingly low. (See 10 perfect jobs for the recession — and after.)

Still, many analysts believe the sector has stabilized enough to continue rebounding on its own, albeit at a painfully slow pace. "It's not going to look like a V-shaped recovery in the housing market. It's going to be one flat, long hockey stick, with anemic growth," says Mark Fleming, chief economist at First American CoreLogic.

The other expiring program — the federal home-buyer tax-credit program, which offered an $8,000 credit to first-time home buyers — was so successful at luring home shoppers into the decimated market last year that the government extended it into 2010 and expanded it to include a $6,500 credit for non-first-time buyers. About 2 million families used the credit in 2009, and an additional 2.2 million to 2.4 million will take advantage of it this year, according to Lawrence Yun, chief economist with the National Association of Realtors. Approximately 800,000 of the transactions have involved home purchases that would not have been made without the credit, Yun estimates. (See high-end homes that won't sell.)

Analysts expect a surge in home-buying activity in the coming weeks as Americans rush to take advantage of the tax-credit program before its April 30 contract deadline. (Under the program, a contract must be signed by April 30 and the home closed by June 30.) Expect lobbying efforts calling for the credit to be extended a second time to escalate as the expiration date draws closer — similar to what happened in the weeks leading up to the first expiration date. But not all experts are on board. Jay Brinkmann, chief economist with the Mortgage Bankers Association, says he would not like to see the program extended a second time. "They work best if they're somewhat rare and short-lived," he says of such programs.

Of greater concern to many analysts is the pending expiration of the Federal Reserve program, which involved purchasing up to $1.25 trillion in mortgage securities backed by Fannie Mae and Freddie Mac. It could open the door to higher interest rates, although the Fed last week hinted that it would keep its benchmark rate near zero for the foreseeable future — a comment likely aimed at preventing panic. (See how Americans are spending now.)

"Right now, the one thing that really stands out to the advantage of the industry is affordability, and if interest rates were to move up sharply from here, that would meaningfully cut into affordability," says Bob Curran, a managing director at Fitch Ratings.

Together, the federal programs baited buyers into the market at a time when unemployment exceeded 10% and the credit markets had seized up. Indeed, sales of existing homes have climbed year over year for eight consecutive months, reversing 43 consecutive months of decline. Curran expects housing starts to rise to 620,000 in 2010, from 540,000 in 2009. However, he notes that the 2010 projection is still far short of the 2005 peak of 2.1 million.

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