Economist's Commentary: September 19, 2008
Quick Take on the Economy: September 19, 2008
By Lawrence Yun, NAR Chief Economist
Another Massive Treasury Bailout
- Another day, another bailout. The Treasury announced this morning it will set up a RTC-like system to buy mortgage debts for the Treasury portfolio. The goal is to cleanse the books of Wall Street firms with bad mortgage debts. Because of the hard-to-value mortgage debt, particularly the exotic kind of Alt-A and subprime flavors, the financial system was clogged with little trust in lending. The ability of financial firms to get rid of the bad debts frees them from worries over margin calls and cash hoarding.
- This bailout may in the end turn out not to be a bailout. Taxpayer funds are placed at risk as Treasury will use the money to buy the bad debts. However, if these mortgage debts turn out not to be as bad as thought, or the Treasury buys at a deeply discounted price, then a recovery in the housing market will make these mortgage backed securities worth more. It is feasible that this action turn out to be a money generator on behalf of taxpayers.
- Remember, many foreign wealth funds were buying bad mortgage debts at discounted prices early in the year in the hopes of a big profit once the housing market recovers. The U.S. government in essence has created the world's largest sovereign wealth fund and it is possible for this investment to either turn sour or to turn a profit. It all depends at what price the Treasury buys these debts and on future mortgage default rates.
- Treasury also is pushing for more aggressive mortgage purchases by Fannie and Freddie. This will bring more homebuyers to the market and trim housing inventory. If home price stabilizes sooner than expected, Treasury could make a good return on its investment. If home prices continue to fall, the taxpayers will be on the hook.
What does today's data mean for REALTORS® and consumers?
- Mortgage lending criteria will not be as overly stringent. Mortgage rates will remain low.
- Home sales will pick up.
- The Treasury has made a bet with taxpayer funds, which could turn a loss or a profit.
Daily Forecast Update
- NAR's monthly official forecast as of September 9th (15K PDF)
- GDP Q3: 1.4%
- GDP Q4: 0.6%
- Unemployment rate at year end: 6.3%
- Average 30-year fixed mortgage rate in December: 6.1%
- Average 30-year fixed mortgage rate by mid-2009: 6.5%
- The next Fed policy change: a rate hike in late April 2009.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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