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Where the Housing Market Goes From Here

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Expect a down leg if the tax credit isn't extended.

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Subsidizing renters with gobs of greenbacks if they buy a house turns out to be a pretty popular program.

Thanks to the tax credit for first-time home buyers, as well as cheaper home prices and lower mortgage rates, existing home sales increased by 9.4% to a 5.57 million annual rate in September, the National Association of Realtors said Friday.

Sales had been forecast to rise to an annual rate of 5.35 million, according to economists surveyed by Thomson Reuters.

First-time home buyers, many of whom certainly owe you and every other taxpayer a thank-you card, rushed in to take advantage of the program.

The question, though, is what happens after the program expires in November?

Patrick Newport, US economist at IHS Global Insight, notes that the government's home-buyer tax credit, like Cash for Clunkers, simply shifts sales from one period to another, but it doesn't do much to heal the housing market.

"The report might, on the surface, look to be really good," Newport tells us. "But, if you think about it more carefully, it's really not great news. We are just trading off good news now for bad news in 2010."

The housing market really improves, says the economist, when inventories narrow. The NAR did report that total housing inventory at the end of September fell 7.5% to 3.63 million existing homes available for sale.

However, Newport doesn't put a lot of stock in this number. Why? Because it doesn't include the so-called shadow inventory, which consists largely of foreclosed homes owned by banks and not listed with the realtors.

Of course, it's possible that policymakers extend the tax credit, but not every economist thinks that's such a smart move.

Joshua Shapiro, chief US economist at MFR, for one, doesn't think so.

"We are spending money we don't have," Shapiro told us. "The faster prices come down, and we get through this correction, then the better prepared we are to grow at a sustainable fashion as opposed to being at the mercy of government stimulus, which is driving the economy at this stage."

As an added kicker, the Wall Street Journal reported that the Internal Revenue Service is now examining more than 100,000 suspicious claims for the first-time home-buyer tax break.

Claims are about 1 million at the moment, so that's a potential 10% rate of fraud.

The NAR also said that prices continued to drop. The median price in September was $174,900, down nearly 9% from the year-ago period.

Newport sees prices falling another 5%, due to a worsening labor market that will fuel more foreclosures.

According to RealtyTrac, more than 300,000 homes are still being foreclosed on every month. In the third quarter, there were foreclosure filings on 937,840 properties, a 23% increase from year-ago levels and 5% above the second quarter.

Certainly, the market took no solace in the numbers from the NAR. Stocks sold off, with many of the homebuilders like KB Home (KBH), DR Horton (DHI), Lennar (LEN), The Ryland Group (RYL), NVR (NVR), and Pulte Homes (PHM) in the red.

Dirk Van Dijk, chief equity strategist at Zacks Investment Research, wouldn't touch the home builders.

"They are a cheap on a book value basis, but those books have been getting whittled away as they report losses," he said.
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