Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Housing Market Will Remain a Government Program

Housing-Market / US Housing Apr 02, 2011 - 05:30 AM GMT

By: Neeraj_Chaudhary

Housing-Market

Recently, the Obama Administration seemed to flash a rare sign of laissez-faire thinking when it issued a report calling for the "winding down" of Fannie Mae and Freddie Mac, the two taxpayer-guaranteed institutions now responsible for backing at least 90% of the US mortgage market. In its press release, the Administration acknowledged that the private sector should be the "primary source of mortgage credit," and that their goal is to "bring private capital back to the mortgage market."


While such a pro-market stance is welcome, astute observers should recognize the intentions as empty rhetoric. Unfortunately, government domination of the housing sector is already a fait accompli, and any serious attempt to remove artificial support will result in the kind of political pitfalls no politician wants to face.

After decades of federal life support, the US housing market has become an invalid that is unable to fend for itself. When the absurd housing bubble finally popped in 2006, prices logically began to plummet back to earth. After national price declines of some 30%, a wave of "stimulus" dollars stopped the free-fall in mid-2009. But after less than one year of "recovery," it looks like prices are headed south again.

The widely-followed Case-Shiller Home Price Index fell 3.1% in January; prices are now at their lowest level since the housing market made its first bottom in April 2009. Sales of existing homes were off nearly 10% in February, and new homes sales were at a record low. As the economy worsens, there can be little doubt that housing is headed for a double-dip.

The government's "make housing affordable" approach to market intervention is the root of the entire problem. To a large extent, this intervention takes the form of mortgage purchases by government-sponsored Fannie and Freddie. Through these entities, nearly all new loans for homes are now destined for public ownership. When these entities buy a mortgage, they are doing so to help the borrower get the needed financing. They have only a casual interest in the investment quality of the transaction. This is very different motivation from the private investor, who is primarily concerned with getting paid back; and on that basis, wouldn't go anywhere near US housing.

Private investors naturally prefer borrowers who are likely to make good on their commitments. Employment prospects figure prominently into this analysis. But nearly one-quarter of the workforce is unemployed or underemployed - that's millions of people who are probably struggling to pay for groceries, let alone a mortgage. Strike them off the list of potential homebuyers.

Of course, some people do have jobs, but that's not enough to satisfy those crazy private investors. They also want to make sure the borrower has some skin in the game, via an initial "down payment" of up to 20% of the home's value. This threshold is a bit of a blast from the past. For most of the last century, a 20% down payment was the standard amount needed to qualify. Just ask anyone older than 55 or so about how they qualified for their first mortgage. I bet the story starts with their struggle to come up with a hefty down payment.

Following these general guidelines, the average American would need to put down $30,000+ to buy a median-priced home in the US. After decades of perniciously low savings rates, Americans just don't have that kind of money. (To get around this thorny issue, the government is going where private lenders fear to tread by making loans for as little as 3.5% down.) Strike two.

Those few private investors who, despite all of the challenges, might still lend money to borrowers are being prevented from doing so by yet another government-sponsored institution, The Federal Reserve, which has prevented private lenders from charging an interest rate high enough to compensate for the extraordinary risk of lending into a collapsing market. Thanks to Helicopter, ahem, Chairman Ben Bernanke, interest rates are being artificially forced lower as part of a grand plan to re-inflate the debt bubble in the US economy. Strike three.

Naturally, all of these headwinds are having a predictable effect on housing prices. Thanks only to a $150 billion handout from the US taxpayer, and hundreds of billions of unprofitable investments at Fannie and Freddie, housing prices bottomed in 2009 and rose into the first half of 2010. But, as noted above, prices have resumed their downward trend, and are now within striking distance of making a new low.

Why is the government support not enough? Quite simply it is because prices were and still are too high. Even with the intervention, house prices have yet to find their natural equilibrium. And no private investor is going to invest in an asset class where prices are clearly headed lower. Strike four (as if we needed another).

The Administration's stated goal is to extricate itself from the US housing market, in order to make room for private investors. Unfortunately, in the current environment, nobody with half a brain is going to put their capital at risk in this sector.

If you were an investor who saw that nearly one-in-four American adults did not have a full-time job, and those that could find work probably didn't have an adequate down payment, and even if they did have a down payment, it would disappear into the abyss of falling housing prices, and even if you could find a suitable borrower, you would be forced to accept a below-market interest rate on your loan, would YOU invest in US housing? Neither would I.

I wish the President luck in getting the government out of the housing market. He's going to need it.

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor Newsletter. Click here for your free subscription.

Click here to download Peter's latest Special Report: My Five Favorite Gold & Silver Mining Stocks.

Neeraj Chaudhary is an Investment Consultant in the Los Angeles branch of Euro Pacific Capital. He shares Peter Schiff's views on the US dollar, the importance of the gold standard, and the rise of Asia as an economic power. He holds a B.A. in Economics from the University of California at Berkeley.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in