If the government carries through with its plans, major support for the housing industry could end by April, leaving the sector to fend for itself. That could happen because of two critical decisions: the tax credit for home purchases that will end with contracts signed by April 30 (buyers have until June 30 to complete their purchases, and the possibility that the federal reserve will stop buying mortgages by the end of March.
The central bank indicated at its last rate-setting Fed Open Market Committee meeting that it intended to purchase $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt by the end of the first quarter of 2010, and to "gradually slow the pace of these purchases to promote a smooth transition in markets."
Both dates could be extended, depending on market conditions. The FOMC emphasized that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in the financial markets. If the Fed doesn't see private money coming back into the mortgage market, it will either need to change its mind or let mortgage rates rise back to the 6%-plus range they were before the Fed started its intervention.
Mortgage rates are currently below 5%. If they jump back up to 6%, lots of people won't be able to afford a home that may have been within reach at the lower interest rate.
This Could Be Just a Test
Clearly, Congress got the message that the housing industry hadn't yet healed enough to go it alone. With foreclosures continuing to mount, there's no reason to think it will be ready on May 1. Considering the election that's looming this year, it's likely that Congress will decide to extend that tax credit as well.
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