Slow Ride to New Paradigm in 2010 By Kevin Chiu
Mortgage rates are creeping upward. The sale of foreclosed properties is slowing as bankers catch up with the record volume of homes in default. Money markets remain tight, and the volume of home sales has slowed as a result of government incentives that were expected to expire as America shifts into a new paradigm in 2010.
The federal government extended and expanded the tax credit for buying a home as the troubled housing market deals with a plague of issues.
The so-called recovery in housing has been boosted by artificial government actions. The Fed has kept interest rates at historically low levels at between 0%-0.25%. Fannie Mae and Freddie Mac have been bailed-out at levels that are setting new records to keep them in business and provide a base for mortgage financing in the U.S. The government is offering first time home buyers an $8,000 tax credit and those who haven’t bought a home in five years $6,500. And lastly the Fed is buying up billions of dollars of mortgage securities.
At no other time has the government been so involved in real estate like it is in the current crisis, and there’s more to come from the White House in February before the president offers the annual State of the Union Address.
But before any real stabilization will develop many of the artificial protections for the market have to come off. The tax credit will expire April 30th. The Treasury will have to stop buying securities that back-up mortgages. The Fed will eventually have to raise interest rates. The hint of higher rates by the Fed will cause bankers to increase home lending rates before the Fed ever makes an announcement. That’s how it works in money markets.
Sooner or later the government will be forced to deal with whether it will nationalize Fannie Mae and Freddie Mac. There are already eager suitors waiting in line, but any take over these days would come at a massive cost to tax payers, who own the majority of the stake in both government sponsored entities by the sheer volume of money that it’s taking to keep them operating.
The climb out of the mortgage mess is expected to take at least four or five years before the government acts to make a decision on Fannie and Freddie.
The government’s housing rescue package has been orchestrated by federal policy makers with little public transparency. As part of the program bankers have been given financial incentives to modify mortgages, but the plan has been deemed a failure. Still, bankers are provided with incentives to work out a short sale or have homeowners sign a deed in lieu of foreclosure.
The foreclosure epidemic has led to the worst economy since the Great Depression, despite economic improvements in some business sectors. In order for the housing market to stabilize the huge number of unemployed will have to go back to work in order to qualify to become homeowners. At its very core the nation is under-going a huge shift in the government paradigm controlling the mortgage market.
The shift is painful for millions of Americans, who are unemployed, under-employed or losing their homes. As usual the government has done very little for the majority of those suffering through the crisis. But the shift to new standards will slowly transform the culture of investing both in real estate and other investments to a new understanding of the nation’s future.