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For a long time I have been discussing, with various degrees of rantiness, government intervention in the housing market. When I first touched on the subject in early 2007, before any bailouts had begun, some of the potential interventions I envisioned seemed kind of far-fetched. By late 2007, as I noted in a Manimal-referencing followup, many of these same interventions were already underway.
And now? The lengths to which the government has gone to prop up the housing market have surpassed even my own cynical expectations. By a long shot.
The most widely-discussed intervention right now is the $8,000 first-time homebuyer tax credit, but that’s nothing. Far more significant is the fact that the Federal Reserve has committed to create money out of thin air in order to finance the purchase of $1.25 trillion worth of mortgage-backed securities. (Purchasing mortgage-backed securities provides funds to be lent out as individual mortgages.) The Fed is also buying $200 billion worth of bonds issued by government-backed mortgage giants Fannie and Freddie, also to presumably be lent into the mortgage market.
This amounts to intervention on an immense scale as nearly $1.5 trillion of money is directly shunted into the financing of home purchases.
Clearly, dumping all this money into the mortgage market results in mortgage rates that are significantly lower than they would otherwise be. It’s tough to say how much rates have been suppressed, but the following comparison gives a rough idea: in October 2008, the month before the $1.25 trillion purchase program was announced, the 30-year fixed conforming mortgage rate averaged 6.20 percent. Last month, the rate on the same mortgage averaged 5.06 percent. This translates to a savings of nearly 12 percent for the monthly mortgage payment on a given purchase price.
Other efforts to prop up home prices are out there as well. Off the top of my head, and not counting the generalized bailout of the entire financial industry, these include: the aforementioned $8,000 credit; the Fed purchase of $300 billion worth of US Treasuries (which also drives down mortgage rates because mortgage rates are determined partially based on Treasury rates); the explicit guarantee of $5 trillion worth of Fannie and Freddie mortgages; government-sponsored FHA loans that require only 3.5% down; and assorted foreclosure moratoria.
My opinion on how much good all these programs will do in the long run can be found in the second article linked above; I will spare readers of this particular blog entry. The point here is that the government has pretty much declared war on the housing bust.
So it’s no wonder that we’ve seen improvement in the housing market in the form of an unusually strong summer rally, increasing sales, lower inventory, and a rapid improvement in the year-over-year rate of change in home prices. But when I write about these improving conditions, I get a lot of pushback from readers arguing that the improvements are not “real” because things would be a lot worse without all the government efforts to support the market.
These readers are absolutely right in the sense that the housing market owes much of its quasi-recovery to artificial and, in the long-term, unsustainable factors.
Where I part ways with them lies in their belief that this distinction matters all that much in terms of forecasting near-term outcomes. The fact is that the government is massively intervening in the housing market. That’s the world we live in today. And to the extent that we are trying to figure out what’s going to happen in the housing market over the next year or two, it’s just not all that useful to put a lot of thought into what would be happening in that non-existent world where the government isn’t going to such lengths to prop up housing.
It’s true that some of the intervention programs are scheduled to end soon. The $8,000 tax credit expires this coming December and the $1.25 trillion mortgage backed security monetization program is set to end in early 2010. That’s the theory, anyway. But already, certain congresscritters are angling to get the homebuyer tax credit extended or even increased to $15,000 and expanded to benefit all buyers instead of just first-time buyers. As for the Fed’s mortgage- and Treasury-buying spree, they stated in August that they “will continue to evaluate the timing and overall amounts of [their] purchases of securities in light of the evolving economic outlook and conditions in financial markets.” In other words, if they feel like extending the program, they will go ahead and do so.
So these predetermined deadlines don’t seem to be very meaningful. As it has done since the beginning of the crisis, the government changes the rules on the fly and as it sees fit. Perhaps some programs will expire and the housing market will weaken again. In this case, I would guess that the real estate-boosting programs would be fired right up again and probably increased at that point. Or perhaps the programs will be preemptively renewed as some of our legislators are already trying to do with the buyer tax credit. I don’t know.
What I do know is that heavy-handed government intervention on behalf of the housing market will be with us for a while to come. Housing market analysts who ignore that fact do so at their own risk.