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.


