Saturday, April 25, 2009

Green Shoots in the Housing Market

With all hands on deck and a return to extensive subsidization of the housing market, the talking heads have been busy proclaiming that the housing market has bottomed and is destined for a rebound. Not only has the Fed embarked on massive quantitative easing (purchasing hundreds of billions in newly issued US Treasuries in an attempt to drive down interest rates), but also legislators have showered potential home buyers with tax credits all with the hope of preventing further correction of the housing bubble that burst in 2007. With government puppets Fannie Mae and Freddie Mac facilitating billions in low interest loans, the government hopes to stimulate housing demand and artificially support prices by driving down the monthly payment of potential buyers. One of the most significant contributors to the inflation of housing prices was the abundance of cheap credit that proliferated throughout the first half of the decade. Now the government is repeating its disastrous policy of attempting to stimulate the economy and prevent necessary market corrections by distorting the credit markets through the manipulation of interest rates and the availability of credit.

Ultimately, this policy is doomed to failure. Interest rates will inevitably rise and the pressure on housing prices will resume. The moratorium on foreclosures has ended, leaving banks with months of delinquent creditors that will no longer be spared their day of reckoning. This supply, however, is offset by the incredible declines in new home construction. The real pricing pressure comes from the disappearance of “affordability” mortgage products such as interest only, pay-option arms, and adjustable rate mortgages with low teaser rates. These products combined with government manipulated interest rates enabled buyers to pay higher and higher prices for homes because they were able to afford the artificially low monthly payments. Similar to the impact of the mortgage interest deduction on the cost of ownership, lower interest rates decrease monthly payments and ultimately inflate housing prices. As interest rates rise, however, the monthly payment becomes dramatically more expensive leading to significant pressure on housing prices. With the amount of new government debt and the impending increases in taxes, one can reasonably to expect future pressure on disposable after tax income further limiting the affordability of housing. It seems that the only green shoots in the housing market are the weeds overwhelming the abundance of foreclosed and abandoned houses.

3 comments:

Bill said...

Good Read.
Thanks

Anonymous said...

Interesting. Well stated.

Don said...

"These products combined with government manipulated interest rates enabled buyers to pay higher and higher prices for homes because they were able to afford the artificially low monthly payments." _ you hit the nail on the head with is statement. I have felt this same way watching home prices rise in my town. Now they are correcting.