AP New Home

A few months ago we said the nation's home builders were cautiously optimistic about the housing recovery.

Today I'm thinking they are a lot more cautious than optimistic.

That's because of the tenuous state of government stimulus in housing.

Several powerful programs are set to expire at the end of this year. Some will likely be extended, others, perhaps not.

Number one is the first time home buyer tax credit, set to expire Nov. 30th. No question, sales of new construction have been juiced by the $8000 bonus, and without it, we could see a reverse in overall sales. This month's home builder confidence survey from the National Association of Home Builders showed a drop in the index measuring sales expectations over the next six months.

There is a bill on Capitol Hill, introduced several months ago, that would extend the credit, expand it to $15,000 and make it for all home buyers, not just first timers. But while it was easy enough to get the credit lumped into the economic stimulus package, it may not be so easy to do it as a stand-alone bill. While some insiders tell me a small housing package is in the works, others give it a much smaller chance given how much pressure Congress and the Federal Reserve are under right now over the budget deficit.

And here's something nobody is talking about yet: Conforming loan limits. Congress increased them to up to $729,000, depending on the median price of the local region, but the increase is set to expire at the end of this year. That puts the conforming loan limit back to $650,000, where it was permanently set last year. Since  Fannie

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[FRE  Loading...      ()   ] and the FHA are really the only game in town, that throws a huge wrench into mortgage availability.

And then there are mortgage rates. The Federal Reserve pledged to buy $1.25 trillion in agency mortgage securities. In the first 8 months of this year they bought $1.07 trillion, according to Inside Mortgage Finance. During that same time about $1.25 trillion were issued, so that means the Fed bought up about 90 percent. No question the Fed will reach its pledge limit before the end of this year.

So what next? "Speculation is going both ways," says Inside Mortgage Finance's Guy Cecala, who believes mortgage rates would be at least a full percentage point higher without the Fed's purchases. "We've got a very fragile housing recovery underway now, and the only thing keeping home sales and refinance activity alive is the low mortgage rates," says Cecala. "I don't think anybody wants to see how healthy the market is without that."

REAL-ESTATE SLIDESHOWS ON CNBC.com:

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Congress could just let the tax credit expire and see what happens. While the Realtors claim the incentive has added 350,000 new buyers to the housing market, others claim it's just a bonus for those who would have bought anyway. I tend to think that historically low mortgage rates are a far greater incentive than the tax credit. Unfortunately, the data shows that the low rates spur refis (nothing wrong with that) far more than they do new purchases.

In any event, housing is likely in for a bumpy ride this fall, as seasonal factors slow organic sales, and buyers wait on the sidelines until they know exactly how much the government is willing to commit to recovery.

Questions?  Comments?