Sunday, November 23, 2008

Fixing the Housing Crisis

From the Desk of Joe Rollins

Everyone probably realizes that one of the major factors leading to the real estate boom and subsequent bubble was low interest rates – they were too low for too long. In the aftermath of September 11th, interest rates fell to extremely low levels and were kept there for almost three years by the Federal Reserve System.

Over the past several years, many homes were being sold in this country with variable interest rates. Even though interest rates were too low, they were just not low enough to satisfy the housing appetite by people who could not afford them. The general presumption was that in a few years, the house would appreciate in value and when the adjustable rate was due to change, the buyer could refinance to a fixed rate. I vividly remember seeing adjustable mortgages in the 3% interest range jump up to market rates after the three-year expiration. Of course, this is not the only reason for the real estate bubble, but it was certainly a major contributing factor.

Today, we have low interest rates again. It is hard to imagine that we basically have interest rates today that are equal to or lower than the interest rates that were available to the general public after September 11th. These low interest rates provide a window of opportunity to turn a good portion of the unsold residential real estate inventory and make housing affordable to many while also helping to put a lot of Americans back to work. In this particular scenario, these mortgage interest rates would not only apply to short-term variable rates, but also to standard 30-year fixed mortgages.

On Thursday, due to the fear gripping Wall Street, a 30-year Treasury bond ended the day with a yield of 3.48%. This is the lowest rate on a 30-year Treasury bond in over 50 years. It also was the largest yield drop for the long-term bond since the day after the 1987 stock market crash. Since the market dropped more in November of this year than it did in October 1987, I believe this drop was an appropriate response.

The government could facilitate a real estate recovery by entering the open market and selling $100 billion in 30-year Treasury bonds at 3.48%. Since there is such a gigantic demand for these bonds at the current time, I feel there would be no problem at all in issuing these bonds to willing buyers. After the government gets the $100 billion from selling 30-year Treasury bonds, they could turn it over to their wholly-owned subsidiaries, Fannie Mae and Freddie Mac. At that point, these quasi-governmental agencies could start extending mortgages at 4% to all qualified buyers. At an average mortgage of $200,000, that would be 500,000 new mortgages for Americans.

A standard 30-year fixed mortgage at 4% will create an immediate housing demand across the United States. Additionally, the agencies could use some of the $100 billion to refinance a great many of the home mortgages that are currently in foreclosure. If in the next six months the government issued $100 billion in new mortgages, we could see a stabilization of the real estate market by the middle of 2009. The combination of low interest rates and low payments will offer many Americans an excellent housing opportunity. Coupling low interest rates with the decline in values that the homes have suffered over the last two years will provide for a buying frenzy unparalleled in American real estate history.

I do not pretend to know more on the subject of real estate than the average person, but I do understand that if the government can issue Treasury bonds at 3.48% and lenders can collect the mortgages at 4%, this would be a win-win for the government, the agencies, the homeowners and ultimately for America.

A government program that actually makes money? What a novel concept!

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