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No fast relief for Main St. residents

The housing market is likely to continue to suffer for some time despite the federal bailout package.

October 05, 2008|Alan Zibel and Alex Veiga | Associated Press

WASHINGTON — The federal government's $700-billion bailout of the financial industry could help home builders and mortgage lenders, but it is unlikely to bring fast relief to anybody trying to buy or sell a house.

The Treasury Department's future purchases of sour mortgages and other securities from banks are designed to inject cash into the credit markets and restore confidence among shaken investors and consumers.

But that may have only a slow and gradual effect on home prices, record foreclosures and the 10-plus-month supply of unsold homes.

"What the bailout does is keeps a bunch of really bad future events from happening," said Scott Shane, an economics professor at Case Western Reserve University. "It doesn't make . . . what's going on today much better."

Many analysts say U.S. home prices -- down 20% from their peak in July 2006 -- still have further to fall, and must hit bottom before demand picks up. The long-awaited bottom in prices could be a year or more away.

"This is a step . . . to put the grease back into the machinery," said Gerard Cassidy, an analyst with RBC Capital Markets. "This is not the panacea."

In the meantime, sellers like Michael Vennum, a corporate lawyer from Robinson Township, Pa., are in a bind. Vennum and his wife want to move out of their 1,000-square-foot, three-bedroom home because they are expecting their second child in February. Unable to sell, he and his wife have put their search for a new home on hold.

"I don't want to overextend myself by having two mortgages," Vennum said. "We need to sell."

The pair put the house on the market four months ago for $155,000 but haven't received any offers, even after slashing $10,000 from the asking price last month.

Vennum doesn't want to drop his asking price below $145,000 because he bought the house for $125,000 five years ago and spent nearly $20,000 on improvements.

To help find a buyer, Vennum, 40, is participating in a nationwide promotion by Coldwell Banker Real Estate starting Friday that will feature around 30,000 properties in which sellers have reduced their asking prices by up to 10%.

Jim Gillespie, chief executive of Coldwell Banker, said he hopes that lower prices, combined with the government's actions, will jump-start stagnant demand. The federal bailout plan, he said, "will give people reassurance that mortgage money is available."

But meanwhile, the nation's economic picture continues to worsen.

The Labor Department said Friday that employers cut payrolls by 159,000 in September, the largest loss in more than five years, while unemployment remained at 6.1%. The cuts included 35,000 construction jobs.

Don Hubble, president of Hubble Homes in Meridian, Idaho, called the government rescue "just imperative" because "we have seen loans getting harder and harder to acquire" to pay for construction expenses on new homes.

The builder has slashed its work force by more than half, to around 50, as housing demand has slumped.

Jerry Howard, chief executive of the National Assn. of Home Builders, also praised the plan but said lawmakers need to do more.

The bailout package "does not address the root problem of housing prices in its totality and Congress is going to have to look at doing something to help establish a floor in the housing market," Howard said.

It remains a difficult situation for builders and mortgage lenders alike because credit remains tight.

On Friday, the national average interest rate on 30-year mortgages was 6.2%, down from 6.3% on Thursday and roughly equal to last week, according to financial publisher HSH Associates.

Though the bailout is attracting most of the attention, another recent change in the mortgage market is likely to have a more immediate effect on consumers.

Mortgage finance companies Fannie Mae and Freddie Mac are rolling back fee increases imposed to shore up their finances this year.

Unlike the bailout, which will probably take months to play out, "it's something that directly impacts mortgage lending right now," said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication in Bethesda, Md.

Speaking just before President Bush signed the rescue bill, Treasury Secretary Henry M. Paulson pledged to act quickly but wouldn't say how the government would go about purchasing troubled assets.

For homeowners who are behind on their mortgages and facing foreclosure, the bailout bill offers little certainty. It directs the Treasury Department to "maximize assistance for homeowners" and write up monthly progress reports, but says little else.

Senate Assistant Majority Leader Richard J. Durbin (D-Ill.) immediately called on the federal government to enact an aggressive loan modification plan in a letter to Paulson and other officials.

"The federal government now owns or has a controlling interest in a large percentage of the outstanding mortgages in America," Durbin wrote. "With that control and influence comes responsibility."

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