Programs designed to help the homeless and those in need of rental assistance got the biggest boost in this budget. The administration proposed roughly $2.3 billion for Homeless Assistance Grants, up from the $1.9 billion enacted in fiscal 2010. Another $9.4 billion was requested for project-based rental assistance, up from $8.6 billion in fiscal 2010.

“In this constrained fiscal environment, increases were made only for the neediest Americans,” the proposal states.

Funding was slashed by $300 million for the community development block grant program, which was funded at $3.98 billion in 2010. The grants are designed to help rehabilitate housing and invest in the economic development of primarily low-income neighborhoods. The budget also proposes about $172 million less for new housing construction for seniors and people with disabilities. The administration is requesting $953 million for that program.

Housing and Urban Development Secretary Shaun Donovan said the cuts would not have been made if economic conditions were stronger.

The Federal Housing Administration, which is part of HUD, insures its lenders against losses when mortgages default. To beef up the cash cushion that FHA uses to pay for unexpected losses, the administration proposes raising the annual premiums that FHA borrowers pay from 0.9 percent to 1.15 percent starting April 18. The premium is used to compensate lenders for loans gone bad. The annual premiums and other fees that FHA collects from borrowers are expected to generate $5 billion in fiscal 2012, up from $2.6 billion in 2010 but less than the $9.8 billion projected for 2011.

In a call with reporters, Donovan said the increase in annual premiums should generate $2 billion of additional revenue next year. The higher premiums will also help reduce the volume of FHA-insured loans, which should drop to $218 billion from this year’s projected $300 billion. That reduction is in line with the administration’s push to scale back the government’s involvement in housing finance.

Homebuilders and Realtors are lobbying Congress to keep alive the tax credit for home purchases and to make it available to more buyers. They say the $8,000 credit—which is for people who have not owned a home for three years or more and expires after Nov. 30—has boosted demand for low-priced homes, many of them foreclosed and in need of repair. But, they maintain, it has done nothing for the “move-up” market, let alone the luxury segment. Many say the housing market will falter unless the credit is extended, doubled in value, and given to any buyer. “The giddiness we see out there [about a recovery] is without merit,” says Richard A. Smith, chief executive officer of Parsipanny (N.J.)-based Realogy, the parent of Century 21, ERA, Coldwell Banker, and Sotheby’s International Realty.
But some little-noticed data indicate there’s more strength in housing than the industry recognizes. Prices have stabilized, and even appreciated, in the middle- and high-priced segments of the market in many cities, not just in the low-priced segment that is most directly helped by the home-buyer tax credit. That’s according to the Standard & Poor’s/Case-Shiller tiered price indexes for 17 metro areas, which were released on Aug. 25 but received relatively little publicity.
Seasonally adjusted prices rose in each segment of the market (low-, medium-, and high-priced) from May to June in cities including Boston, Washington, and Chicago. High-end prices went up even in hard-hit Phoenix. Las Vegas, where foreclosures are running extremely high, is the only one of the 17 metro areas that saw a price drop in all three price categories in June.
“The tiers are really revealing,” says economist Karl E. Case of Wellesley College, who developed the index with Yale University economist Robert J. Shiller. “[The rising prices] can’t be just first-time buyers.” While prices could fall after the expiration of the tax credit, says Case, “It’s not a knockout blow if the expansion is broad-based.”
Those arguing that housing needs government life support say most of the sales action is in foreclosed homes, which tend to be super-cheap and are being bought as starter homes or investment properties. But a National Association of Realtors member survey seems to contradict that theory. Even as home sales rose, the share of first-time buyers dropped from 53% in March to 30% in July.
As for the argument that luxury is dead, Toll Brothers (TOL), the nation’s largest luxury homebuilder, announced last month that in its May-July quarter it posted its first year-over-year increase in signed home contracts since 2005. Toll Brothers even started cutting incentives in some markets, mostly in the Northeast and mid-Atlantic states.
True enough, the housing market remains weak. Increasing the tax credit to $15,000 for all homeowners through the end of next year would result in 675,000 additional home sales, according to an analysis by Mark M. Zandi, chief economist at Moody’s Economy.com (MCO).
There is evidence that sales fall when credits expire: In California, homebuilding slowed in July after a $10,000 credit for newly built homes expired. And with the rush of summer buying over, the market remains vulnerable to rising unemployment as well as a new wave of foreclosures, which could flood the market and drive down home prices. The Mortgage Bankers Assn. said last month that 9.24% of residential mortgage loans were delinquent as of the end of June, the most since recordkeeping began in 1972.
On the other hand, the housing market might be able to absorb more foreclosed properties as long as banks dribble them out slowly, says Rick Sharga, vice-president of Irvine (Calif.)-based RealtyTrac. “We may be in an unusual period of time where the market is recovering in spite of the record number of foreclosures,” he says. “It’s hard to explain, but that’s what the numbers suggest at the moment.”
With prices down and mortgage rates low, housing affordability is the best in years for those who can qualify for a mortgage (admittedly no easy feat). Michelle Meyer, an economist with Barclays Capital (BCS) in New York, says that while the tax credit did contribute to the lift in sales and prices, “A lot of it has to do with greater affordability and a brighter economic outlook. Even if you say some of the gain is artificial, it’s still true that we’re seeing an increase in housing demand, and that shows fundamental strength.”