No where did I say I agree with propping up housing prices. As a matter of fact I dont. I merely pointed out that it is the Fed’s intention to do so. Right or Wrong. However there policies have unintended consequences that are dimetrically opposed to what they’re trying to accomplish.

Unless I could be certain that I wouldn’t need to sell for many years, why would I want to buy at a time when artificially reduced interest rates are artificially propping up home prices?

A slight reduction in tax-deductible interest payments for a few years isn’t worth the risk of a large, non-deductible capital loss when I have to sell.

The last thing I want the government to do is try to prop up real estate prices. The banks would love nothing more than that though, after all high real estate prices are why they exist.

Of course in the real world we should have seen higher reported inflation early in this decade. Remember the clinton adm took housing out of cpi in 1998 and replaced with rents which did not go up as much as houses.

We all shudl be wondering what changes are being made now.

Perhaps we need an FASB pronouncemnt as to how inflation should be consistently measured–but they are busy with market to whatever you want or works for you.

Its pretty paradoxical. The Fed wants to lower interest rates to allow home seekers to purchase homes and slow down the collapse in the housing market. However, what is happening is banks are refusing to lend to borrowers with questionable credit which is limiting the impact on the ‘home sales’ side of the equation. One of the byproducts of this policy is that insolvent banks receiving TARP monies are able to lend at lower rates than solvent banks with stronger balance sheets. The borrowers with ‘good’ credit are refinancing at the better rates (ie companies with weaker balance sheets). This is ultimately leading to a migration of mortgages of healthy borrowers from solvent banks balance sheets to the balance sheets of banks with insolvent balance sheets. The refinance is typically done at a lower rate then the previous mortgages which means the earnings generated from those healthy borrowers will decrease earnings for the sector as a whole over time. This migration will also reduce the earnings for the companies with stronger balance sheets ultimately weakening them over time.

So the net-net of the policy is to weaken the earnings of the sector as a whole while decreasing the solvency of banks with strong balance sheets and propping up insolvent banks. All while having a minimal impact on the drop in housing prices.

The irony is amazing. Its quite amusing to watch our arrogant politicians talk about the stengths of the capitalistic systems in good times, siteing, as one of its most fundamental strengths, the efficiency cycle which weeds out the weak hands. Then when we start to experience that efficiency cycle they do everything in their power to revive the irrational exuberance and ultimately lead to a weaker economy.

History is paradoxical. Im a contrarian by nature, and I firmly believe that having an ‘expert in the Great Depression’ sitting in a position of power during this period of history will be viewed as a liability and not an asset. Many people find comfort in the fact that Mr Bernanke has studied the Great Depression. I find it quite scary. Its the “self proclaimed” experts that typically end up fighting the wrong battles and are hell bent on avoiding the situation rather than managing the situation. They are more often then not the ones that arent capable of seeing the forest for the trees and spend their entire time trying to prove the theories they’ve spent of lifetime building.

Course, just making small talk.

jm-

“based on what the putative “landlord” needs monthly to pay the mortgage and taxes.”
When do you think that ‘they’ will no longer able to hold out? Also, I wonder to myself are the bankers hoping that the echo-boom will save them? The carrying costs on all this must be staggering. Is it possible that the nosedive in MV is a function of the inefficiencies imposed on the economy by the irrational debt loads? Did monetizing everything and optimizing asset utilization insure this downturn? Is leaving untouched the equity in your house a less efficient allocation of capital than its monetization through a HELOC which is then converted into a BMW X5 and two years of trips to Tuscany and Turks and Caicos and a Timeshare in Costa Rica or whatever? Silicon implants, de-uglification surgery, poison injections?
How do you increase MV through further extension of the right to charge the vigorish?

So they sit empty, month after month, season after season.
When these “landloards” can no longer hold the places off the market, rents are going to really plunge. There’s an awful lot of inventory out there.