Housing Bottom? The $1.55 Trillion Effect

From agriculture to autos to insurance, the U.S. government is throwing taxpayers' money at various industries. The largest beneficiary of the taxpayer's dollars by far however is the U.S. 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: (Click to enlarge)


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 Mae (FNM) and Freddie Mac (FRE) are allowed to buy), is unprecedented.

Let's take a sober look at the numbers. The U.S. 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 U.S. government alone. That doesn't even include all the TARP funds meant to get banks lending again. And some banks like Chase (JPM) and Wells Fargo (WFC) 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.

Comments

[Steven Hansen:]

nothing wrong with your argument.

i simply see that nominal housing supply (NAR stated), pent up supply of people who would like to sell, changes in demographic housing preferences, and an over-supply of rental units is simply a flush which beats your 4-of-a-kind.

structure oversupply will simply continue to force housing prices lower albeit at a slow rate.

Aug 12 05:38 AM

[Davewmart:]

'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.'

So when the music stops, what will happen to house prices?
Buying now sounds like a fine recipe for getting in early on future underwater mortgages whilst they are still available.
This is exactly the sort of reasoning which led to so many over-committing in the housing boom.

Aug 12 08:28 AM

[Andy1234:]

I have a feeling housing is going to go down a ways.

Interest rates at some point will need to rise.....this will put further pressure on prices.....unless the government again....prints money like crazy and loans it all out. I don't think they will loan it out like they were, but who knows right?

Aug 12 08:39 AM

[DannyBoy29:]

Thanks for bringing up the pooints you did in this article. It seems the public and media only focus on the bailouts to the banks, AIG, autos but no one talks about the risk we (taxpayers) are taking on by what is going on at Fannie and Freddie. Like you said it only taks a slightly higher default rate on a $5T balance sheet to cause a major problem. And if that problem happens there will not be a company in need of a bailout it will be our country.

Aug 12 09:42 AM

[ebworthen:]

Look at your chart.

Now look at your figures, $1.55 TRILLION to prop up mortgages and banks.

This is being done by stealing money from taxpayers and giving it to banks and people who gambled and lost or aren't paying their mortgages.

Now go back and look at the blip on the chart.

Now tell me again that blip is worth enslaving my children with a tax burden that can never be repaid for the sake of bankers and their golden toilets and government handouts of easy money to get votes.

Not tell me that this theft, this breaking of moral contracts, of the rule of law, of ethics and the ideals of democracy, will end well?

Aug 12 09:45 AM

[De Graaf:]

"But for now get that cheap conforming mortgage, use the tax credit and go buy a home."

I'm sorry to say: But this is the worst piece of advice I've heard in current circumstances. The argument is flawed in you understand the real problem in America. Consumtion by borrowing.

You say people always need homes. I don't concur with that statement as people need shelter. Shelter comes in many forms when a government defaults on its liabilities.

In Soviet Russia for instance, homes were centralized and mostly apartment blocks, easily heated with relatively low cost pipelines for basic needs.
In the US of today, we have a decentralized situation. When finance for (underground) electrical grids and water supply become scarce, as well as lacking maintenance for sewage etc, your newly acquired home will continue to diminish in value.

Also, when the CRE collapse endures in the coming years, communities will have less amenities and this will put more pressure on the housing prices accross regions.

And thats just some examples. Have you even considered the increasing crime level that is going to struck America in the coming decade? With so many weapons around, an depressive army force retreating to the States that lacks the proper Healthcare solution, you can bet you ass that there will be a revolt for basic necessities.
Cops and army personnel might look patriots now, but when they lose everything they got, you better prepare for their skills.

They won't all be supporting a rebuild of their communities as they are scrambling for their own survival after homecoming into...into what exactly? Wasteland II?

The 'great recession' will soon show to be a real 'depression'. America is falling apart and some of you out there aren't seeing that yet. Whether it is ignorance or lack of judgement, get those puppets in Washington out now, or face the consequences.

Regards.

Aug 12 01:00 PM

[HardwoodFlo...:]

It's the right line of thinking but there is a problem. the upper end of the market will not bottom until people can get JUMBOs. banks only will write FHA backed loans- no JUMBOs. So, as a result the only people getting financing are those taking out a mortgage below $400K. Fine if you have a $1MM in cash to put into your house but if you make $300K and your 40 it's hard to get financing if you need a JUMBO. As a reult the high-end of the housing market might continue to fall unless this problem is addressed.

Aug 12 03:15 PM

[NEOblogger:]

There seems to be a strong linkage between how people feel about the housing market and the economic initiatives that are underway right now. Clearly the Federal initiatives are trying to stimulate the lower level of the housing market, mostly it would seem, to stem a downward slide in asset valuations that seemed just a few months ago to be taking all of us with them.

We don't yet know if this a band aid or improved confidence in the economy and the stability of banks is part of the cure. If it is the former then the prophets of doom like De Graaf will finally be right - after all they have been calling for this for years, long before this crisis. Even before Obama!

I suspect that nationally house prices still have some way to fall, primarily due to the fact that we haven't completely unwound the bubble, particularly in the areas that went up the most, such as Las Vegas, Florida and California. However there are other markets where the supply factor is very different, with few foreclosures. All that has happened is that the market has become illiquid, so the continued downward pressure on prices just isn't there. This does not mean that prices will go up, especially on properties that require non-conforming jumbo loans, which are not only far more expensive but very hard to get. Without a wholesale rethinking of the securitzation model and a good bout of amnesia from investors, this isn't going to happen for years.

So it seems that the mainstream housing prices will trade in a pretty narrow band for many years to come, primarily linked to income and employment. This is as it should be and the period 2002-2007/8 was the aberration. Some areas will still go down a lot, which will pull the national numbers down, but this does not mean the wholesale end of America. Maybe the America that the right wing believe it should be, but not the real America that we all live in.

One last thing, the debts we are taking on are large and will have consequences that we will all have to pay, but still much better than flying off the cliff we were heading over.

Aug 12 04:09 PM

[Davewmart:]

'One last thing, the debts we are taking on are large and will have consequences that we will all have to pay, but still much better than flying off the cliff we were heading over. '
Better for whom? For the bondholders, including a number of billionaires as well as pension funds etc, and for bankers who are still drawing huge bonuses, but since the issue has not unwound how do you know it will be 'better' for the taxpayer, who have been on the end of lousy dealmaking from Paulson whilst he fed their money to his buddies.
I would argue that the trillions spent has simply put things off, that asset prices have been artificially supported at huge cost, and the funds have gone to pork barrel projects and the well-connected when they could have actually been used to set up new banks without the burden of the bad debts of the old, failed ones, and who would consequently have been in a position to provide funds for industry, instead of propping up zombies who refuse to lend and are making their money through huge charges amounting to usury.
After spending trillions of Main Street's money, all that has been achieved is the zombyfication of the America economy, and delay in assets reaching affordable value.
House prices at 6 times income are a feature of a bubble economy, not sustainable or affordable housing.
The rally is a head fake, whilst assets continue to be stripped from the economy by the connected, and the middle classes are getting closer to tent city.

Aug 12 04:47 PM

[rockerchic:]

Man I tell you, some people have green shoots growing out of their wazoo... and what's worse is all the followers grazing on them, calling it hope.

Aug 12 08:12 PM

[realold:]

Thanks for expressing the moral issues. It seems seldom mentioned. Personally, it makes me sick and is unexcusable. Both of my sisters' families are in the that boat. One has not made a house payment in almost two years and is still in her house. The other had her mortgage payment reduced by 1/2. They are my sisters, but their mistakes and short sightedness got them where they were. Why do you and I have to pay for it and shame on them for taking it. The obvious result, by the way, is that they are both Obama for life fans.


On Aug 12 09:45 AM ebworthen wrote:

> Look at your chart.
>
> Now look at your figures, $1.55 TRILLION to prop up mortgages and
> banks.
>
> This is being done by stealing money from taxpayers and giving it
> to banks and people who gambled and lost or aren't paying their mortgages.
>
>
> Now go back and look at the blip on the chart.
>
> Now tell me again that blip is worth enslaving my children with a
> tax burden that can never be repaid for the sake of bankers and their
> golden toilets and government handouts of easy money to get votes.
>
>
> Not tell me that this theft, this breaking of moral contracts, of
> the rule of law, of ethics and the ideals of democracy, will end
> well?

Aug 12 10:42 PM

[realold:]

You actually believe that "right wing" Americans want the economy to go down the tubes? Enjoy your Kool-Aid and keep paying debts with more debts. Oh, that is me paying the debts. Sorry, have fun with my money.


On Aug 12 04:09 PM NEOblogger wrote:

> There seems to be a strong linkage between how people feel about
> the housing market and the economic initiatives that are underway
> right now. Clearly the Federal initiatives are trying to stimulate
> the lower level of the housing market, mostly it would seem, to stem
> a downward slide in asset valuations that seemed just a few months
> ago to be taking all of us with them.
>
> We don't yet know if this a band aid or improved confidence in the
> economy and the stability of banks is part of the cure. If it is
> the former then the prophets of doom like De Graaf will finally be
> right - after all they have been calling for this for years, long
> before this crisis. Even before Obama!
>
> I suspect that nationally house prices still have some way to fall,
> primarily due to the fact that we haven't completely unwound the
> bubble, particularly in the areas that went up the most, such as
> Las Vegas, Florida and California. However there are other markets
> where the supply factor is very different, with few foreclosures.
> All that has happened is that the market has become illiquid, so
> the continued downward pressure on prices just isn't there. This
> does not mean that prices will go up, especially on properties that
> require non-conforming jumbo loans, which are not only far more expensive
> but very hard to get. Without a wholesale rethinking of the securitzation
> model and a good bout of amnesia from investors, this isn't going
> to happen for years.
>
> So it seems that the mainstream housing prices will trade in a pretty
> narrow band for many years to come, primarily linked to income and
> employment. This is as it should be and the period 2002-2007/8 was
> the aberration. Some areas will still go down a lot, which will pull
> the national numbers down, but this does not mean the wholesale end
> of America. Maybe the America that the right wing believe it should
> be, but not the real America that we all live in.
>
> One last thing, the debts we are taking on are large and will have
> consequences that we will all have to pay, but still much better
> than flying off the cliff we were heading over.

Aug 12 10:47 PM

[amccoy:]

Funny, I come to the same conclusion, but from a slightly different vantage point. Interest rates ARE low. What makes them REALLY low though is that they are low DESPITE the high potential for inflation.

I expect that we are looking at a long slow recovery in many sectors and I don't expect housing prices to show any upward trend in value for quite some time, if ever. Price is quite different though. I do expect higher rates of inflation. There is a cost to 40 years of pretending tax cuts are a good idea while running a deficit, and it is now coming due. We are eventually going to pay that cost through higher inflation (even as the economy stagnates or shows anemic growth at best). The coming inflation will HURT, but borrowing money in todays dollars and paying it back in highly inflated dollars makes a great deal of sense to me. I am looking at the long term. Over the next 10-20 years I expect to see rates of inflation that make the 5.25% interest look like free money...

Aug 13 04:53 PM

[NEOblogger:]

Clearly differing viewpoints!

However I do believe that the Trumpeter model of letting everything go down just so it can be rebuilt stronger is a little to Larry Kudlow (i.e. Simplistic but doesn't stand up to reason) to hold up. If they had let everything go down, we would have to be reconciling every mistake at the same time, rather than giving ourselves a chance to do it over time.

I agree with you that we need to continue to address all of these issues (and do not believe we are yet doing so), but many of the problems we have are the unwinding of an unsustainable credit bubble that took years to build up. So while popping it in a few short months of panic may look good on paper, it would have decimated the US economy beyond a point of no return. Effectively what the Germans and British did to one another in WW2.

It's pretty hard to work your way back from nothing!

Aug 13 06:50 PM

[NEOblogger:]

By the way RealOld - I'm sure an awful lot more of this is being paid with my money than yours!

Aug 13 06:51 PM

[holmesnmanny:]

Nothing good is gonna happen for the overall economy until they start taxing the super-rich to pay for the mess that was created by Bush's program's to give every Tom, Dick, and Harry an opportunity to get a free house in the early 2000's.

The problem is that the Republicans have the people brainwashed into thinking that any tax hike translates into a tax hike for all, even if you clearly state it's only gonna apply to the rich.

This is what happens when you have an unequal distribution of wealth.

Aug 14 05:32 AM

[spidercharm:]

Bailout...was a scam of the century...I can't believe people bought into this... Talk about GS stealing money from everybody's pocket overnight...without you knowing it. What a joke.

Wake up everybody, we have disaster on our hands...nothing is cured. Changing accounting rules doesn't do a thing...Giving out money to dumb bankers doesn't make it any better either.

Oh and housing has a way way long to go in most areas. For example, place where I live, homes are still being proudly listed for double the price they were in 2002-2003.

Aug 26 11:37 PM