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Obailout Plans: Just an exercise in hindering price discovery?

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March 24, 2009 – Comments (4)

Just something I've been thinking about regarding Barack Obailout and Timmay Geithner's plans to make the world a better place.

Start with efforts to refinance bagholding homedebtors who can't afford, or don't want to afford, their mortgages. Fed steps in to knock down rates for refinancing. FDIC and Fannie do same. Government, through FDIC and treasury, also provides huge, taxpayer-backed incentives to "private" money to buy mortgage pools for dimes on the buck, and these folks turn around and offer refis that cut people's mortgage payments in half.

So, the question is: What should a new buyer pay for a home in a region with a lot of refinancing activity?

In other words, if I'm shopping for a house in a neighborhood with 1,000 houses, and I know that roughly 30% of them were bought at the top of the market a few years back, for, say, $500,000 each. The prices on houses actually selling ("comps" recently have only dropped to, say, $400,000.

However, I suspect that most of those 30% who bought at the top and are underwater are getting some kind of a refi that moves their rates to 3% or 4%.

What does someone who'd not going to get better than a 5% rate for a new purchase pay for a house?

Without geographic data on refi, I submit that a prospective buyer at a higher-than-refi interest rate can't know what the real value of a home is in that neighborhood, but that it is most certainly a lot lower than any "comps" would indicate.

I suspect that part of the plan here is exactly this kind of price obfuscation. It is, at least, a very convenient side effect.

Obailout and Timmay (along with the NAR and others) would like nothing more than to see the reported prices of homes stay high, or quit falling so drastically. A giant, nationwide refinance plan(s) is, of course, a defacto admission that homes are not worth what people were signing up to pay. (A fact made more clear by Obailout's programs, along with Comrade Sheila Bair, that determine refinancing terms based on bagholder income, rather than any attempt to measure property value.)

However, without a very clear regime of refinance reporting, it will be difficult, if not impossible, for a new homebuyer to know what a house is really worth in an area where the comps are still inflated, but the underlying cash flows being paid toward those inflated prices are newly based on artificially low interest rates...

Sj

4 Comments – Post Your Own

#1) On March 24, 2009 at 10:17 AM, dudemonkey (37.14) wrote:

TIMMAY!!!!

I agree that there seems to be this idea that falling home prices are the problem when, IMO, the real problem is that they got unreasonably high in the first place.  What we're seeing now is the much-needed correction that we've been putting off since the dot-com bubble.

 

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#2) On March 24, 2009 at 11:10 AM, TMFBent (99.82) wrote:

Did a few numbers to try and get at what the implied price haircut is if you keep monthly constant, mortgaged amount ("price") the same, etc.

Note: refi rates are anecdotes pulled from cyberspace. The rates in the bottom 3 rows of each table are based on bankrate.com's rates for new mortgages, first undershooting their rate, next at their rate, next one higher. (All 30-year...)

implied haircut from refi

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#3) On March 24, 2009 at 11:14 AM, jgseattle (32.74) wrote:

Interesting......I never looked at the bailout from this angle!  Instead of looking at the price paid for the house to determine value look at the cashflow committed to purchase the house then determine the value based on current discount rates.

Very interesting!

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#4) On March 24, 2009 at 11:27 AM, TMFBent (99.82) wrote:

I need someone to doublecheck my math, but it looks like the implied haircut increases substantially if you assume mortgage is based on 20% down in all these scenarios.

Sj

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