Sunday, August 9, 2009

How can the housing market be stabilizing? $1.55 trillion of new government funds, that's how.

From agriculture to autos to insurance, the US government is throwing taxpayers' money at various industries. The largest beneficiary of the taxpayer's dollars by far however is the US housing sector.

In a recent post Economists jolted by housing data we discussed signs of stabilization in housing sales and prices. Given the dollars thrown at the problem, it shouldn't be a surprise.

New home sales:

A number of readers have sent e-mails with some highly negative reactions, arguing that it's all nonsense, a "temporary blip". It may not feel like a stabilization if you live in Merced, CA or El Centro, CA (given how much prices have run up in these places). But at the national level the government dollars are starting to have an impact. The amount of money spent by the federal government to support this market, particularly via conforming mortgages (those that Fannie and Freddie are allowed to buy), is unprecedented.

Let's take a sober look at the numbers. The US Treasury is continuing to prop up Fannie and Freddie as they bleed from being completely over-leveraged. The agencies are financing $5 trillion in U.S. mortgages. It only takes a slightly higher than normal default rate to become under-capitalized on a $5 trillion balance sheet. The Treasury has so far injected nearly $100 billion of equity into the agencies, $45.9 billion for Fannie Mae and $51.7 billion for Freddie Mac.

Of course Obama's "Making Home Affordable" program to modify nine million American mortgages is not helping the agencies. They are forced to purchase loans out of mortgage backed securities and take losses, while the Treasury (the taxpayer) is covering those losses by injecting more funds into the agencies.

But that's not all. The Fed has also purchased $200 billion of agency debt directly on it's balance sheet. And to top it all off, the Fed has bought $1.25 trillion of mortgage backed securities, all as part of the "quantitative easing" program.

Add it all up to get $1.55 trillion to fund conforming mortgages by the US government alone. That doesn't even include all the TARP funds meant to get banks lending again. And some banks like Chase and Wells Fargo are in fact lending. It's hard to keep this massive bubble from completely deflating (as it would have on it's own), but throwing such resources at it is definitely keeping it from going flat - at least for the next few quarters.

And of course who could forget the Obama Administration "First-Time Homebuyer Tax Credit" of up to $8,000 per buyer. It expires on December 1, 2009 and should get some folks out there shopping for homes.

So when you see a pop in home sales, don't dismiss it as a temporary blip - it's the $1.55 trillion taking effect. Just remember people still need homes, and as long as the government's unprecedented support continues (to the point that it begins to feel like socialism), someone out there will be buying. At some point down the road the funds will stop flowing and some of this music may stop. But for now get that cheap conforming mortgage, use the tax credit and go buy a home.

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