GSEs Into Conservatorship: Can Housing Stabilize Now? 19 comments
-
Font Size:
-
Print
- TweetThis
Now that Treasury has taken the GSE’s into conservatorship it is likely that the housing market can begin the process of stabilization and recovery. The Treasury’s take-over of the GSE’s essentially means that the government will be providing liquidity into the mortgage market by way of re-starting the all-but-defunct secondary market for mortgages with planned purchases mortgage-backed debt. This will have an important implication for the dollar, which is discussed later.
One of the main features which enabled the housing market’s expansion was the change from the originate and hold model of mortgage lending to the originate and distribute (sell) model. The market for mortgage securitization basically dried up after August 2007 but now, the government will be there to make the purchases that no other entity can (or is willing) to make. Essentially, the government is taking the other side of the mortgage securitization trade as the buyer of mortgages that financial firms will again originate and distribute (sell). Now that liquidity is expanding, which means the supply of money within the mortgage system will increase, it is likely to see mortgage rates decline. Once mortgage rates decline, that obviously will make housing more affordable even if housing prices themselves hold steady because the monthly cost of carrying a mortgage will decrease.
In a previous article, we estimated where mortgage rates would need to decline to in order to make a house priced on the median (according to the NAR) affordable to a household earning the median (as defined by the Census Bureau) using an industry standard maximum of 28% of monthly income as an affordable cost to carry a mortgage. Under these circumstances, we found that if the current NAR median home price were to remain constant, current mortgage rates for a 30-year, fixed rate mortgage would need to fall to 5.63% in order to meet the requirement of affordability.
There already are some very interesting things happening in the housing market when you look at the numbers from the National Association of Realtors.
First, the median sale price of an existing home has been increasing since January even as inventories (due in part to the increase in foreclosures), expanded. This is partially explained by a new study from the National Bureau of Economic Research [NBER], which concluded that “the impact of foreclosures on prices, while negative and significant, is quite small in magnitude.”
Second, the large declines in the seasonally adjusted annual rate [SAAR] of existing home sales and median sale prices occurred between August and September 2007. Economists tend to look at the housing statistics in a year over year basis, and here is where things are about to get very interesting.
If the SAAR of existing home sales holds at the present level (5.0M) by the time we get to the report for September (which will be issued in October), the year over year decline (which was -13.2% in the year to July) will be just -2.15%. Even if September sales hit the average SAAR for 2008 (4.93M), the yearly decline will be -3.52%, which is still a marked improvement. As far as the median price is concerned, if the present level ($212,400) holds into September, the year over change will be for an increase of 0.9% versus the 7.1% decrease which occurred in the year to July. But even if September’s median price falls on the 2008 average ($204,570) the yearly decline will be reduced to 2.81%.
The bottom line here is that once we get the report for September, the housing market (except for inventories) is likely to be statistically much improved over what we have been seeing for a long time.
Implications For The Dollar
The dollar is likely to continue appreciating against the high-yielding currencies (EUR,GBP.AUD and NZD). Against the yen, appreciation will happen if the stock market can find its footing. The main reason to expect further dollar appreciation is twofold:
1. The Federal Reserve has real rates of interest which are negative, while the BOE,ECB,RBA and RBNZ do not. The pound has an especially large potential to fall, because the BoE is scheduled to cancel its special lending facility on October 20, a move which will decrease liquidity as the U.K. economy goes into contraction.
2. The move by the Treasury to take over the GSE’s and provide liquidity (a market) for mortgage securitization will allow housing to begin the stabilization and recovery process, especially if mortgage rates can decline.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 19 comments:
With a diluted portfolio, government sovereign ratings go to junk very soon, banks will face decreasing liquidity, and we will be looking at 15% rates very soon. Great plan.
What a stupid comment. Government backed is risk-free. You'll see mortgage rates drop now. Watch it happen. Paulson may be a lot of things but he's no dummy and this is all planned.
This isn't over, not by a long shot!
Who in the world is going to hold their stock, preferred or common now? That's an immediate $36 Billion dollar loss in comany value my friend. How much is it really going to take for the GSE's to break even after all of the double talk out of Washington?
What Hank really said today is that our mortgage backed securities we said are worth $5 Trillion are not really worth it, but trust me, they are now that the fed, who is also $12 Trillion in the hole, stepped in and is now backing this debt with monopoly money... The government is one heck of a co-signer. If the government and the dollar is so great, why are foreign banks dumping dollars and converting to Euro's?
Where is this liquidity going to come from to lower rates? Ben lowered rates and mortgage rates went up. why? Banks don't have it to loan. Supply and demand... Hank just said the GSE's would shrink by 10% a year. That doesn't sound like the GSE's are going to add liquidity either. Game over. Thanks for the stupid feedback.
Additionally, the lending facility will be extended to the Federal Home Loan banks.
Mr. Paulson went on to say that "given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets," which means that credit spreads are likely to narrow.
This is more liquidity into the system and lower borrowing costs. It's expansionary.
Government backed is risk-free.
Free of risk as long as the government has the ability to pay it back. Do you see taxes going up to pay them back? Or do you see the government printing the $$ to pay back the debt and if I were holding treasuries I would sell them like if they were toxic because THEY WILL NOT BE PAID BACK
I think you got these two sentences in the wrong order. Did-it-again has it right.
What do we do next?
and how about the secondary market? when those monsters start in 2010 MBS fire sales in the tune of 150bn per year? you think those will not be significantly discounted to change hands?
Tell that to the folks in Zimbabwe.
According to the pie chart on the tax forms, in 2006 we paid 6% of our national outlay merely to pay interest on the debt. Since then, the debt has expanded a LOT, and this will boost it still more.
How long until Uncle Sam has trouble making the payments on the interest?
Yes, he can always kick the monetary printing presses into high gear, but to reiterate my initial point, just ask the folks in Zimbabwe how well that has worked out.
When we have a national interest expenditure in the 15% and up range, it will be VERY DIFFICULT to get the debt under control (as if it wasn't difficult before!).
We have a new president and administration coming in a few months, will all the financial balance sheets be clean by then or does anyone know what is on the balance sheets. NAR says getting better, but they have been saying that for 2 years. Builder earnings down, but I think I see something at the end of the tunnel. Autos and airlines next for bailout.
It seems we only gave a breather to the MBS/CDO/etc foreign debt holders provided the government will do a better job of running Freddy/Fannie or maybe call the FSBOs.
Mortgage Rates will not drop unless LIBOR drops.
Meanwhile, rates on lines of HOME Equity continue to increase. To offset this, the Fed should be lowering interest rates. Inflate now and do it fast, because the next round of foreclosures will be accelerated by the departure of homeowners whose lines of Equity Borrowings exceed the value of their homes and their rates rise.
Wealth Destruction = Deflation.