Tax Credit’s Expiration Might Not Derail U.S. Housing Rebound

Oct. 20 (Bloomberg) -- The looming expiration of the Obama administration’s tax credit for first-time homebuyers will stall rather than abort the nascent U.S. housing recovery, economists said.

The $8,000 credit for Americans buying their first house, due to end Nov. 30, revived sales and construction earlier this year, pulling forward gains that would have otherwise occurred in coming months, said economist Patrick Newport at IHS Global Insight in Lexington, Massachusetts. At the same time, the number of new houses on market hasn’t been lower in 26 years.

“This tug-of-war between the effects of the tax credit and low inventories may continue for a few more months, but eventually, low inventories will win out,” Newport wrote in a note to clients. “Low inventories will require that builders ramp up production, which means that the job losses in the residential construction sector will soon turn to job gains.”

Work began in September on 590,000 houses at an annual rate, figures from the Commerce Department today showed, fewer than most economists surveyed by Bloomberg News anticipated. Permits, a sign of future construction, unexpectedly decreased.

The figures disappointed investors, knocking stocks down from a one-year high and overshadowing better-than-forecast earnings at companies from Apple Inc. to Caterpillar Inc. The Standard & Poor’s 500 Index was down 0.7 percent to 1,089.82 at 1:53 p.m. in New York. The S&P Homebuilder Supercomposite dropped 5.2 points, or 2 percent.

Low Inventories

Commerce Department data last month showed there were 262,000 new houses for sale in August, down 36 percent over the past 12 months. The number has not been lower since February 1983.

“The next couple of months will be tricky,” Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, said in a note to clients. “We remain optimistic for 2010.”

Should sales stabilize around current levels, the demand will still be enough to cut into inventory further, said Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York.

There were about 315,000 single-family houses being built for sale in September, according to calculations by JPMorgan Chase, compared with an August sales pace of 429,000, said Reinhart.

“Even stable sales imply some increase in single-family housing starts” over the short term, Reinhart said in an interview. Longer term, the outlook will depend on fundamentals such as the strength of the economic recovery and jobs, he said.

Some lawmakers are calling for extending the tax credit to boost home sales.

“The work of stabilizing the housing market won’t be done” when the credit expires next month, Senate Banking Committee Chairman Christopher Dodd told a hearing of his panel today. “We still need to use every tool at our disposal to fix this problem.”

To contact the reporter on this story: Carlos Torres in Washington Ctorres2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net