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Lee Adler is the editor and publisher of the Wall Street Examiner, and the Wall Street Examiner Professional Edition, a membership based newsletter for sophisticated traders and investors. He also runs the world renowned Stool Pigeons Wire message board at Capitalstool.com, where his alter ego, Dr. Stepan N. Stool the stock proctologist, informs, entertains, and annoys readers.

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Best They Can Do

I update this chart of mortgage applications weekly in the Wall Street Examiner Professional Edition Fed Report. It is based on data published by the Mortgage Wankers Association each week. The more important indicator is new purchase applications (dark blue line). It’s as close as we can get to a real time barometer of housing demand due to its weekly release about a week after the data was collected.

Click to enlarge

As we approach the deadline to take advantage of the homesuckers’ tax credit on April 30, we’re seeing a minimal uptick off the February low. The index has rallied back to the 2 year downtrend line and the 52 week moving average. This includes data through April 16. So I fully expect to see these trendlines temporarily broken to the upside in the next two weeks. The NAR’s existing house sales release tomorrow, and the Bureau of BS Statistics release on new house sales on Friday are likely to look pretty darn good due to the homesuckers’ last minute rush to take advantage of the rest of US taxpayers. That should be good for a nice spike in housebuilder stocks (bears take note). It’s what comes after that is scary.

We have some experience with what to expect, and it squares with the common sense notion that the tax credit is pulling house purchase demand from the future. When the first homesucker’s credit expired last year, purchase demand collapsed. That tax credit program applied only to first time buyers. This one applies to everyone, not just first timers. The demand vacuum following the expiration of this program should be even more extreme, and last longer.

In addition to the drop in demand adding to downward pressure on prices, a little discussed effect of the tax credit is that the effective sale price to the buyer today is inflated by at least $6,500. Without the credit, buyers will be lowering their bids commensurately. Combine that with the seasonal increase in houses for sale that occurs every year from May to July, and you have the recipe for a real disaster in the housing market. That’s likely to surprise the markets and trigger yet another round of foreclosures with the attendant problems for the financial system.

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There Are 3 Responses So Far. »

  1. Agree with end result. Disagree with how this takes us there. Correlations are non-sequitur. Does $8000 & $6500 urge buyers to hedge higher offers? As a broker, I work 95% FT buyers. It’s not the case. If standard purchase pace is 300 (arbitrary number), but conditions bring demand down to 200, and incentives are given – THAT DON’T FIX THE CAUSE OF THE PROBLEM – and that incentive burns through before getting back to 300, then that is correct. Dumb. Then steroid is gone, back with problem and our crack baby is still dependent and with the shakes. IE, if sales can’t hit 300 until unempl gets down to 8% then dumb to throw money at buyers unless prepared to do so until 8% unempl is hit. But if you let it die before unempl goes down to 8% then yes, just sped up to jump off of cliff.

    The one smart thing being done, still dwarfed by the bigger picture, is that the incentive does end and hands off the market to the hotter season. Lessen the fall from 10,000ft down to about 9800ft.

    But incentive won’t make non-buyers buy. It just makes buyers act a little earlier. Then, as you state… you have the gap once it’s gone. It doesn’t make them hedge higher offers, though.

  2. The tax credits by themselves don’t entice buyers to make higher offers, but competition does. And there’s a lot of competition in the market due to the front loading of demand and the deadline looming. Buyers are seeing multiple offers (or hearing of them from their Realtor) which is giving them the incentive to make a higher initial offer.

    End result is still (and always) the same: Cheap or ‘free’ money *always* inflates prices.

  3. Mike, absolutely. False market due to manipulation. One rumor that sounded plausible, but no more substantiated than Trump’s authentic hair, banks are holding onto inventory to allow market to rebound a little bit more to reduce losses. Also, perhaps to see how much more intervention they may receive to their favor as they prevent the flooding of increased foreclosures.

    Incentivized to keep the poison in. prolongs the problem. Back to Lee’s very agreeable point, and to yours.

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