Tuesday, August 26, 2008

Housing Market and the GSEs
The most recent Case-Shiller housing data is out today with some mixed messages. The bad news is that home prices in twenty markets dropped 15.9% from a year earlier, and the second quarter's 15.4% decline was worse than the first quarter's 14.2% drop. The good news is that declines in later months in the quarter have slowed and inventory declined, which indicate that housing declines may be easing. Nine of the twenty regions showed positive returns. The areas that continue to look bad are Miami, Phoenix and Las Vegas.

The article in the Wall Street Journal (linked to above) says that one issue holding back housing is uncertainty around Freddie Mac and Fannie Mae, the two Government Sponsored Entities (GSEs) that buy the vast majority of mortgages. The market's reluctance about the two companies has caused their cost of capital to increase that has kept mortgage rates high, as overall interest rates have declined in recent months. Until the GSEs' financial situation is resloved mortgage rates are going to stay high and the housing market is going to muddle along. I suspect that a .50% decline in mortage rates would give the housing market a boost, maybe more so than the recent housing bill that was passed. Solid GSEs, acquiring mortgages, would also allow banks to resume lending.

No comments: