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Best They Can Do?

Originally published by email . Use the form in the right sidebar to receive the free Wall Street Examiner Economic Bulletin emails.

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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