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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Wed Jan 06, 2010 4:41 pm GMT Post subject: |
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I completely agree with the first part of your post. I'm just mentioning that so it doesn't look like I'm ignoring it.
CL wrote: |
Your second point - I think what government trying hard to do is to establish a floor. So I think government action is largely reactionary, and whenever there is a large price freefall, government will do whatever it can to arrest it. The larger the fall, the more agressive it becomes. As such, I think it takes the 15%-20%drop out of the picture. So the rate of government intervention is correlated with how sharp the "pain" it has to endure.
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Perhaps it could take a 15-20% nominal drop out of the picture, but I doubt the government has as much control over inflation adjusted prices.
But is establishing a floor really the goal? Here's what I've been wondering about the current government intervention in the market - is the government's goal not to limit the total price decline but to limit bank losses by reducing the portion of the decline borne by individual households? Is the home buyer tax credit and mortgage rate manipulation just a way to encourage more transactions now while sale prices will still cover most of the 80% owed to the primary lender? Once this round of musical chairs is through, another drop of 20% could then occur without directly leading to losses for the primary lender on the new loans.
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CL Guest
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Posted: Wed Jan 06, 2010 5:11 pm GMT Post subject: |
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I do agree inflation-adjusted price is hard to control since all these market manipulation may stroke inflation. However, remember while if the source of the problem is runaway inflation while nominal price stay the same, then the pain is not only on housing market, but virtually everywhere. And when Fed needs to jack up the long rate to fight inflation, everyone (small business in particular), not only homeowners, suffer. So essentially government is spreading the pain from specific group of reckless homeowner to everyone.
For your second point, I think the issue is 2 fold - pure speculation, but another 10-20% drop this year will probe a lot more strategic default in area other than CA, AZ, FL, etc. If you bought in 2007/2008, are 10% in the hole, considered walking away but chose to wait for the market to turn around for that 10-20% short term gain, another 10-20% drop will simply dash your hope.
Also, Fed still tons of new vintage MBS on their book, and almost all the 2009 new mortgage are backed by FHA/Fan/Fred. They really cannot afford those new mortgage to turn bad. And even in 2009, not all mortgage has 20% downpayment (the expansion of FHA last year was scary and they require less than 10% downpayment). So I don't think the government has 20% cushion before they act agressively again.
That's why I think the government will try to establish a floor - coz without it, the descending spiral can spin out of control (like shoppers waiting for a bigger sale to come), and government loses big time in that case. It's almost like preventing a bank run. |
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