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Tax credit to steady, not rescue, shaky U.S. housing

By Lynn Adler

NEW YORK (Reuters) - Don't expect the expanded home buyer tax credit to be a permanent cure for the U.S. housing market. It won't.

Take the spike in mortgage demand created by the tax credit this summer. It was followed by a plunge as the incentive was set to expire, showing how housing's recovery is tethered to government aid.

As the economy emerges from a recession triggered by the housing market crisis, increasing home sales is viewed as essential. Housing and related business account for about 20 percent of the economy, and more sales means more spending on everything from dishwashers to energy-efficient windows.

The Obama administration last week extended an $8,000 first-time buyer credit, added a $6,500 provision for move-up buyers and increased income limits. Eligible borrowers must sign contracts by April 30 and close loans by June 30, 2010 instead of closing by the end of this month.

Both the credit and another major government action -- the purchase of more than $1.4 trillion in mortgage-related securities aimed at cutting home loan rates -- will now end within weeks of each other. The purchases stop by March 31.

Unless the employment picture brightens around that time, housing does not have enough footing to forge a recovery on its own, most economists and industry experts said.

"Housing was going to fall off a cliff if they didn't do it," said John Burns, president of John Burns Real Estate Consulting in Irvine, California. "We're still expecting a leg down, but it shouldn't be as significant" as his prior estimate, which called for sales to plunge as much as 30 percent.

Up to 400,000 people bought a home for the first time due to the credit, boosting first-time buyers to a record 47 percent of sales over the past year, the National Association of Realtors has said.

With the help of the credit, existing home sales will rise 2 percent this year and 13.6 percent in 2010, the group estimates.

The housing credit has pulled many a wary buyer off of the fence, but it is not a fix to the mess of troubles that spawned the deepest housing slump since the Great Depression.

This is a slow, tentative recovery, evidenced by the most recent reading of builder sentiment of the National Association of Home Builders. Its index remained at a low 17 in November while a reading above 50 indicates more builders view sales conditions as good than poor.

If the government pulls out the rug "when the economy is growing and we're actually adding jobs, we will have essentially managed our way through this and the leg down won't be very significant" in housing, said Burns. "If it happened now, it would be devastating."

Mortgage rates hover near record lows below 5 percent but will start rising as the economy improves and the Federal Reserve stops buying mortgage bonds.

Burns expects home price gains for at least the next six months while the government supports are in place. "We're telling our clients to sell homes as quickly as they can now because of uncertainty in the back half of 2010."

LIFE SUPPORT

These extraordinary life-saving measures raised new-home sales for five straight months before a dip in September and pushed existing home sales to a two-year high.

While housing typically slows in winter months and heats up again in spring, sales could be pulled forward this year because of the credit.

"The decision to extend the credit was really to try to avoid the downside risk of the unraveling of this modest recovery," said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies.

Consumers are well aware of this: Applications to purchase homes sank last week to a nine-year low, the Mortgage Bankers Association said, as buyers held out in hopes that the tax credit would be revived.

Following the tax credit extension, website traffic at real estate search engine Trulia.com jumped to record levels, increasing by 75 percent in the first week of November from a year ago.

Few disagree that affordability is a major lure, with record low borrowing costs and home prices that have tumbled on average by about 30 percent from 2006 peaks.

"Economists, though, do worry about programs like this that can borrow demand from the future," Retsinas said.

"It's hard to describe the housing market as stable or being in good shape when over 3 million families are receiving foreclosure notices this year," he added.

Questionable lending practices earlier in the decade and now 26-1/2-year high unemployment forced record numbers of struggling homeowners to lose their homes this year.

A federal mandate for lenders to alter terms on many failing loans is gaining traction. But just 20 percent of those eligible are in trial modifications, the Treasury said, and it is unclear how many of these will be permanent or successful.

"We don't think the recovery could occur in the absence of this housing tax credit," said Richard Smith, chief executive of Realogy Corp, parent of Coldwell Banker Real Estate, Century 21 and other real estate companies. "All things being equal, however, we need to look at unemployment and creation of jobs."

(Editing by Kenneth Barry)

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