Income for Life

The training wheels are coming off

In case you missed it, the National Association of Realtors on April 22 announced that existing home sales in the United States for the month of March jumped a resounding 6.8 percent from February and more than 16 percent over March of 2009.

Lawrence Yun, chief economist for the NAR, said the government's tax credits have helped create the wave of home purchases.

“The home buyer tax credit has been a resounding success as these underlying trends point to a broad stabilization in home prices," Yun said in a news release. "This is preserving perhaps $1 trillion in largely middle class housing wealth that may have been wiped out without the housing stimulus measure.”

There is no data in the NAR release that shows where Yun got his $1 trillion figure, but no matter what the number is, we get the point: The home buyer tax credits have helped the sagging real estate markets across the country.

In fact, the latest NAR report shows a national inventory of unsold homes of about eight months, down from a buildup of 8.5 months in February. That the number of bank-repossessed foreclosures jumped in the first quarter of this year, and yet the overall inventory of homes on the market is dropping, is a good sign.

The question is, will the momemtum be sustainable when the tax credits expire a few days from now? Can real estate keep rolling along without the government's training wheels to support it?

To degree, it probably will.

It was no accident the tax credits were set up to expire at the end of April. Sales are traditionally higher in spring and summer, so just from a seasonal aspect, sales will be higher in the near future than they were in, say, January and February.

True, first-time homebuyers -- ones more likely than "move-up" buyers to purchase distressed homes -- might not be as large a pool for foreclosed homes that will continue to hit the market, but signs point to investors taking up plenty of that slack.

The NAR report for March showed that investors made up 19 of all sales -- a pretty high total. Also, cash sales accounted for 27 percent of transactions, a higher-than-usual number. Those figures show that investors are recognizing that there are good deals out there and are very active. Active investors could also keep the momentum in the market going, even after the plug is pulled on the tax credits.

A distressed property on average sells for 15 percent below market value, acccording to the NAR, so expect investors to stay involved in that market.

Another good sign for an overall recovery is one we haven't seen in a long time: good news on the jobs front. Unemployment, while still at an elevated level, doesn't appear to be growing. And a report from the National Association for Business Economics actually forecasts job growth over the course of the year. As jobs become more secure, people will feel more comfortable purchasing homes. A good jobs forecast is good news for real estate markets.

So, while it might be a bit wobbly at first -- just as a youngster on a bike is -- the real estate market should be able to stay upright when the feds take the training wheels off. 

Profiting from the disaster

Obviously, I don't know where you stand on the issue of financial reform, the tighter policing of Wall Street, but if you haven't at least thought about it recently, you're either hiding under a rock or you haven't heard about the allegations against Goldman Sachs.

The United States Securities and Exchange Commission has levied a civil fraud suit against Goldman, basically accusing the banking giant of creating an investment product designed to fail, then betting on its failure to the tune of major profits.

Most of that probably isn't that disturbing to hear. In this era of hedge funds and terms such as "credit default swaps," we've gotten pretty accustomed to the notion of "shorting" securities -- betting on them to underperform.

But the thing about the Goldman allegations -- again, they are simply allegations right now -- is they really make you think about the fundamental stability of the system. After all, this was an institution generating billions and billions in real estate loans. If they then can create products based on risky loans they are generating and sell it to investors, knowing it's going to blow up, then profit from it when it does, there's a problem. There's a great New York Times article that explains the whole story, including the "Abacus" investment around which the SEC's charges center.

Is Goldman solely responsible for the risky loans that ultimately led to the real estate bubble burst? Of course not. Everybody was making risky loans. But this case brought against Goldman makes you wonder how many others profited from mortgage-backed investments they knew were doomed to fail?

If you were a regular Joe, sitting in an English pub somewhere when the Titanic made its maiden voyage, it's one thing if you bet on it sinking. It's another thing entirely if you're the captain, you bet big money that it's going to sink, then you steer it into the iceberg.  

The issue of financial reform, more government regulation of the banks, is a touchy one. There's a financial reform bill in front of the U.S. Senate right now that has touched off some spirited debate, to put it politely. It's become a bipartisan battle (surprise), and where you fall on the issue probably centers around what you feel about government's involvement in the markets.

But no matter what you think about the issue of financial reform, you have to at least feel a little uncomfortable that an entity contributing to a disaster can do so while profiting massively from it. The credit crisis, the real estate problems that ensued -- those are things that are going to mess with the economy for many months, if not years to come. And mess with people's lives -- their jobs, their homes, maybe their health.

It just doesn't seem right, does it?