- Commentary -

November 24, 2009 (FinancialWire) — Wall Street seems to be in love with the pre-owned house sales numbers released Monday. So why is homebuilder Toll Brothers’ (NYSE: TOL) CEO talking about a “train wreck” on the way?

The numbers are certainly impressive, at least for existing houses: The National Association of Realtors released October figures on Monday showing sales of existing homes up 10.1% month-over-month — to their highest level in 2½ years. Investors were filled with fresh confidence.

As Reuters points out, “recovery is being supported by the $8,000 tax credit for first-time buyers, low mortgage rates and falling house prices.” This month, the government extended the incentive into next year and added a $6,500 credit for home owners buying a new house.

The tax credit had been set to expire, prompting speculation that the sales numbers reflected buyers getting in while the getting was good. But there are other government supports in play that have stimulated the market, (kept it on life support in many places) and whose excesses may lead to a second crash in housing.

We’re talking about cheap Fed money, obviously, as well as Fed and Treasury measures to take bad housing assets off the balance sheets of banks. But there’s also the expansion of FHA mortgage support in play.

As The NY Times pointed out recently, the FHA has been standing in the mortgage insurer of last resort role once played by gullible purchasers of MBS and other real estate related paper. The backstop that allows reckless lending practices.

The Economic Stimulus Act of 2008 doubled the maximum loan the FHA insured, to $729,750. This has led to a huge increase in FHA-backed lending in high-cost markets in places like — (you knew this was coming) – Florida, California and Nevada. At least three of the horsemen of the housing apocalypse.

Wouldn’t you know it? FHA-backed loans have recently seen a massive spike in delinquencies!

We’ll quote Bloomberg: “Foreclosures on prime mortgages and home loans insured by the Federal Housing Administration rose to three-decade highs in the third quarter, driven by the biggest job losses since the Great Depression.”

Bloomberg, citing Mortgage Bankers Association, said, “One out of every six FHA mortgages was late by at least one payment and 3.32 percent were in foreclosure, the highest for both since at least 1979.”

This is what prompted Robert Toll, CEO of homebuilder Toll Brothers, to say, “It’s a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money.” 

So, we’ll see about the sustainability of the housing recovery. Right now it’s not looking good long term unless employment can take a dramatic leap upward, because extreme government backstopping can’t go on forever.

[Go to http://www.financialwire.net/?s=philip+holmes to see more commentaries by Philip Holmes.]

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