Ethical Foreclosure

In its September economic outlook, Freddie Mac says it expects 4 million new and existing home sales in the third quarter, a possible 20.7% decline from last year and 23% drop from the previous quarter. Recent reports of plummeting home sales and near record-high delinquencies has shaken confidence in the "fragile" housing recovery. After the homebuyer tax credit expired in April, the National Association of Realtors (NAR) reported existing home sales fell 27% in July, and new home sales have fallen to the lowest point since 1963.

The news will further weigh on the market. JPMorgan Chase analysts lowered expectations of housing recovery in the next four years. Jon Daurio, chief executive at the distressed loan purchaser Kondaur Captial, warned that home prices could fall another 20% as well. "The main issue for the housing market outlook is how much of the recent weakness in home sales can be explained by transactions that were pulled forward by the credit – that is, 'borrowed' from sales in future months – versus signs that a more fundamental deterioration may be underway," according to Freddie Mac.

Freddie has considered two scenarios for how the market will respond to the missing government stimulus. The first is a "payback" of the "borrowed" sales over a gradual recovery. Under this scenario, home sales would drop another 10% in August from the low in July that start to climb out of the bottom. This assumes about 600,000 of the home sales were pulled forward in response to the tax credits. The second scenario only half of these sales were pulled forward, and the rest were purchases that otherwise wouldn’t have been made without the credit. Under this scenario, sales would recovery faster, perhaps by the end of October.