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Real estate roundup: New construction falls; troubled borrowers fare well with counseling; FDIC selling real estate; commercial real estate slump hits Fannie and Freddie

November 18, 2009 | 11:14 am

The big news today in real estate is the unexpected decline in new residential construction. The Commerce Department reported that housing starts in October dropped 10.6% to a seasonally adjusted 529,000 annual rate compared with the prior month and a 30.7% drop from October 2008.

Analysts attributed the drop to builders’ trepidation over whether Congress would extend a popular tax credit for first-time buyers ahead of a Nov. 30 expiration. Just as Southern California home prices and sales received a boost from buyers taking advantage of the credit, builders worried that without an extension the recovery would slow.

Dean Baker, at the Washington-based Center for Economic and Policy Research, has a good analysis this morning that delves a little deeper into the effect the tax credit had on the housing market. His take is that the extension of the credit will not have nearly as big of an effect as the first credit and that the housing market is looking at a sharp drop-off in coming months.

Baker writes:

Given the lead time between contracting and closing, September was the last full month in which homebuyers could have signed a contract and been confident of closing in time to meet the deadline for the tax credit passed in February. While this led to a rush of buyers wanting to get in before the deadline, it also meant that there would be a sharp falloff in sales in subsequent months.

A little more follows here:

The extension and expansion of the homebuyer tax credit by Congress should give a modest boost to sales, but it is unlikely to have nearly as large an impact as the original credit. Most potential first-time buyers will have already purchased their homes. The extension of the credit to existing homeowners will provide some additional incentive for homeowners to buy a new home now (it also provides serious opportunities for gaming), but this will have little net effect on the market. Most current homeowners who opt to take advantage of the tax credit will put their home on the market, leaving no net change in the balance between supply and demand.

In other housing news out of the nation’s capital, the Washington Post had an interesting story based on an Urban Institute study set to be released this morning. The study finds that troubled homeowners who receive housing counseling are 60% more likely to avoid foreclosure and have their mortgage payments lowered significantly than those who try to figure it out themselves.

And the Federal Deposit Insurance Corp., the bank regulator, has gotten into the real estate business big time this year. Bloomberg News reports this morning that the FDIC has sold the most real estate this year since 1994 as it takes over properties on the books of failed banks.

Finally, the Wall Street Journal writes today that the tanking commercial real-estate market is beginning to hit mortgage titans Fannie Mae and Freddie Mac. The firms are facing losses on the loans they made to apartment buildings, according to the Journal.

-- Alejandro Lazo

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