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Commentary on the Housing Market as of 10/17/08
by Peter L. Zachary, MAI, MRICS

My last commentary was on the passage of the Federal Housing Finance Regulatory Reform Act (HR 3221). This law was signed by President Bush on July 30, 2008, according to Wikipedia (the free on-line encyclopedia). It authorizes the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed rate mortgages for sub-prime borrowers if lenders write down principal loan balances to 90% of current appraised value. It also established the Federal Housing Finance Agency (FHFA) out of the Federal Housing Finance Board (FAFB) and Office of Federal Housing Enterprise Oversight (OF HH EO). I thought this was the saving measure of the housing market but shortly thereafter, the United States was confronted with startling news. On September 7, 2008, according to the New York Times, the FHFA announced that it had put Fannie Mae and Freddie Mac under conservator ship of the FHFA. These companies own or back approximately 5.3 trillion in mortgage. The act to "nationalize" Fannie Mae and Freddie Mac "grew out of deep concern among foreign investors that the companies debt might not be repaid", according to the New York Times. Investors who own the companies' common and preferred stock will essentially lose their investment while holders of debt will be repaid.

And then the roller coaster ride really started to take off. The events of the next month are summarized on the front page of the NY Times on October 9, 2008. It had a time line chart of the following events:

September 16, 2008 - The Federal Reserve injects $85 billion into the American International Group (AIG).

September 17, 2008 - The Treasury sells new bills to provide additional funds for Federal Reserve initiatives.

September 18, 2008 - Working with other central banks, the Federal Reserve makes 180 billion dollars available in currency swaps.

September 19, 2008 - The Treasury temporarily guarantees money market funds against losses up to $50 billion.

October 3, 2008 - President Bush signs the $700 billion economic bailout package.

October 7, 2008 - The Federal Reserve said it will start buying unsecured short-term debt from companies.

October 8, 2008 - The Federal Reserve funds rate is cut to 1.5%.

And in between the above dates, the Treasury did not help Lehman Brothers, which went bankrupt on Monday, September 15, 2008, according to the September 15, 2008 issue of the New York Times. The October 11, 2008, headlines on front page of the New York Times said: "Rich Nations Pushing Joint Rescue." The article discussed how the US and six other nations would coordinate a plan to rescue the financial industry. The October 12, 2008 issue of the New York Times said that President Bush said the countries had agreed to general principals to respond to the crisis, including working to prevent the collapse of important financial institutions and protecting the deposits of savers.

Treasury Secretary Henry M. Paulson said the United States would move aggressively on one part of the plan by infusing American Banks directly with cash and taking ownership stakes in return. This is a result of banks refusing to lend money to each other, let alone normal business and consumer borrowers.

On Tuesday, October 14, 2008, the headlines on the front page of the New York Times were "US Investing $250 billion to Bolster Bank Industry.

Needless to say the destabilization of America makes the decline in housing prices seem irrelevant, although everyone says that housing prices caused our economic problems. People say housing prices must stop declining before the economy can recover. Statistics showing declines in prices even from a month ago are outdated. In my opinion, the effects of the current financial crisis will continue to have a declining affect on housing prices. This is confirmed by the article on the first page of the New York Times on Thursday, October 16, 2008, entitled "Home Prices, At Root Of Crisis, Still Seem Far From The Bottom". The article states "home prices across much of the country are likely to fall through late 2009, economists say, and in some markets, the trend could last even longer depending on the severity of the anticipated recession. In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: more and more homes are going up for sale, but fewer and fewer people are willing or able to buy them." The article continues "The number one thing that drives housing values is incomes", said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. "When incomes fall, demand for housing falls."

I ended my January 2008 Commentary by saying "When I was a young man, a little bird landed on my shoulder and said: "Don't worry, things could be worse". And sure enough things did get worse." I hope I am not responsible for things getting worse. Don't blame me, blame the bird.

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