Extension of tax credit fuels market

WASHINGTON — First-time buyers taking advantage of a special tax credit gave sales of existing homes their biggest surge in a decade, raising hopes for a turnaround in the housing market and pleasing Wall Street.

While rising foreclosures and disappearing jobs still threaten the comeback, there are now bidding wars for houses in some cities, and home sales are nearly 36 percent above their low point in January.

Analysts said the gains in October mainly reflected the tax credit of up to $8,000 for new homeowners, which was due to expire this month before Congress extended it until spring — and expanded it to more buyers.

The sales figures Monday from the National Association of Realtors provided the juice for a rally on Wall Street. The Dow Jones industrial average, also lifted by a weak dollar, rose more than 130 points.

Analysts said the extension of the homebuyer tax credit should help sustain the housing market next year. Yet the overall economy will probably benefit only slightly from higher home sales.

That's because there are still too many factors weighing down the recovery. Foreclosures are rising. Job creation is slow. People remain reluctant to spend. And construction of new homes — as opposed to sales of existing ones — plunged in October.

The biggest contribution the housing industry makes to economic growth is from home building. Commissions and fees generated from home sales also help, but far less than construction.

"I wouldn't want to bet the house on housing, really, in terms of the strength of the U.S. economy going forward," said Diane Swonk, chief economist at Mesirow Financial in Chicago."

The Realtors group said resales rose 10.1 percent to a seasonally adjusted annual rate of 6.1 million in October, from 5.5 million in September. It was the biggest monthly increase in a decade and far better than what economists expected, according to Thomson Reuters.

At the current sales pace, there's a modest seven-month supply of previously occupied homes on the market. Sales are still running 16 percent below their peak in 2005, but real estate agents say the pace has definitely picked up.

"People who are looking, they are serious," said Harrison Tulloss, an agent with ZipRealty in the Raleigh-Durham area of North Carolina. "They're not riding around with me if they need to go shopping or buy a turkey."

The housing market is being driven by reduced prices and federal programs to lower mortgage rates and bring more buyers into the market. The median sales price was $173,100 in October, down 7 percent from a year earlier and 25 percent below the peak.

Many experts predict prices will hit a new low next spring, perhaps falling 5 to 10 percent further as more foreclosures spill into the market. The government has tried to counter that trend by offering the tax credit and keeping mortgage rates low.

Without the deadline looming for the tax credit, home sales are likely to fall over the winter as buyers hibernate for a few months. Analysts say the new deadline — buyers have to sign a purchase agreement by April 30 — means sales will surge next spring, before dropping back again later in 2010.

What happens after that is anyone's guess.

"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 First American CoreLogic. "It's really hard to tell."

The government has also helped the housing market by acting to reduce mortgage rates. The Federal Reserve, for example, has pumped $1.25 trillion into mortgage-backed securities to try to lower mortgage rates and loosen credit. That program is scheduled to end by March.

If rates go up without the government help, homes would be less affordable, which could dampen demand.

A disquieting report last week from the Mortgage Bankers Association said more fixed-rate home loans made to people with good credit were sinking into foreclosure as layoffs go on. A record-high 14 percent of homeowners with a mortgage were either behind on payments or in foreclosure at the end of September.